PUBLIC GOODS

Public goods are goods that have two qualities, they are said to be non-rivalrous and non-excludable in consumption.
 
A simple example of a streetlight serves to explain this. If one person walks past a streetlamp, in no way does this diminish the light available to another person. This is entirely different from a good like an apple.

If one person eats an apple there is no more apple, and this denies anyone else from consuming the apple. So a product that is non-rivalrous, like a streetlamp, is one that does not diminish when someone makes use of it. (Some texts use the phrase non-diminishable). It is also impossible to stop someone from seeing the light from a streetlamp. This is what is meant by non-excludable.

So public goods have the properties of non-rivalry and non-excludability, and both conditions are necessary. Schools are not a public good because first there are a limited number of people who can fit in the building, i.e. it is not non-rivalrous, and it is also possible to exclude people by putting gates up and refusing entry.   Old economic texts repeatedly use lighthouses as an example of a public good. Here is Henry Sidgwick writing in late nineteenth-century, ‘it may well easily happen that the benefits of a well-placed lighthouse must be largely enjoyed by ships on which no toll could be conveniently levied’, and John Stuart Mill writing in the late 1800s, ‘it is the proper office of government to build and maintain lighthouses…since it is impossible that ships at sea which are benefited by a lighthouse, should be made to pay a toll on the occasion of its use, no one would build lighthouses from motives of personal interest, unless indemnified and rewarded from a compulsory levy made by the state’.

In more modern textbooks this view is expressed as the free-rider problem, that is, with public goods it is impossible to make people pay for them. Even if some people will pay others won’t, and if they get a free ride this diminishes everyone else’s willingness to pay. So public goods, it is argued, would not be produced at all in a free-market system because it is impossible for private firms to cover the costs of providing them. Therefore public goods must be provided by the government and paid for out of tax revenue, hence the name public goods. The free-rider argument leads some writers to suggest that these goods are an example of market failure which is referred to as missing-markets.
 
However, with a more careful reading of the older texts and we can see that public goods are sometimes provided by the free market. Sidgwick again, “lamps erected at the doors of private houses…….. necessarily throw light also on streets.”
 
The idea that public goods must always be provided by the state was dealt a further blow by Ronald Coase in the 1970s. Coase took the trouble to study the history of lighthouses in Britain. He found that between 1610 to 1675; “at least 10 were built by private individuals…..and tolls were collected at the ports by agents”. Coase also found that in 1820, 24 lighthouses were owned by Trinity House (the government department in charge of safety at sea) and 22 were privately owned. Even the lighthouses constructed by Trinity House were paid for by charging ship-owners tolls as part of port fees.
 
Coase’s work does not deny the existence of public goods but it does refute the idea that public goods must always be paid for by the state or that they are as common as other texts may suggest. A modern example is that of radio programmes. Radio shows meet the criteria of public goods, they are non-diminishable and non-excludable, but some are paid for by the government and some by private companies who earn revenue from them through advertising. Furthermore, technology improves with time and affords ways of excluding people who previously could not be prevented from listening. Scrambling TV and radio signals means that people can only listen if they pay for decoding boxes.

Goods that do not fully fulfil the definitions of non-excludability and non-rivalry are sometimes called quasi-public goods. An empty beach initially looks as its it is a public good, if you sit on the beach, the beach remains and you are not stopping others from using it. However, as the beach fills up it becomes harder and harder for other people to find a place. A beach sometimes meets the criteria and sometimes not, so quasi-public good is a useful descriptor.

Some textbooks complicate matters by adding the idea of non-rejectability into the concept of public goods. A public good such as a radio programme can be rejected, i.e., you can refuse to listen and turn the radio off. You could reject the light from street lamps - although this might require some absurd behaviour such as walking past them with your eyes shut. However it is impossible to reject some public goods, the police force’s mere existence deters crime and we all benefit whether we pay our taxes or not. Perhaps the best example is the nuclear deterrent. (Arguably) residents of countries that have nuclear weapons are safer because they deter other countries from attacking. It is impossible to reject this protection. Nuclear deterrence might therefore be classified as a pure public good.

Explain why apples are NOT public goods

Links to other parts of the course 1. The free-rider problem is also associated with a problem called the tragedy of the commons, which refers to the overuse of resources that are collectively owned, or that have no ownership, such as the sea. 2. Ronald Coase’s work suggests that the problem of under-provision of public goods may be at least partly solved by granting property rights