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'''Public goods''' are commodities or services, such as fresh air and national defence  that have to be provided by governments, because it is not possible to devise a pricing system to enable them to be marketed.
'''Public goods''' are products and services that can only be collectively financed  because it is not feasible to require individual users to pay for using them.


==The origins of the concept==
In the 18th century, Adam Smith wrote: 
:"The third and last duty of the sovereign or commonwealth is that of erecting or maintaining those public institutions and those public works, which, although they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could not repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain ."<ref>[http://www.adamsmith.org/smith/won-b5-c1-pt-3.htm Adam Smith: ''An Inquiry into the Nature And Causes of the Wealth of Nations'', Book 5, Chapter 1, Part 3, (first published 1776)]</ref>;<br>
-  in the 19th century, John Stuart Mill elaborated the idea, arguing  as an example that  it would be impossible to  charge seamen according to their use of lighthouses
:it is a proper office of government to build and maintain lighthouses, establish buoys, &c. for the security of navigation: for since it is impossible that the 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. <ref>[http://www.econlib.org/library/Mill/mlP73.html#Bk.V,Ch.XI  John Stuart Mill: ''Principles of Political Economy'', Book 5, Chapter 11, par 57, Longmans, Green, 1848]</ref>;<br>
- and in the 20th century, Paul Samuelson (who at first referred to public goods as  "collective consumption goods") derived a formal proof of the proposition that "no decentralized pricing system can serve to determine optimally the levels of collective consumption" <ref> Paul Samuelson: ''The Pure Theory of Public Expenditure'', Review of Economics and Statistics, vol 36 1954</ref><br>


===Public goods and externalities===
==Defining characteristics==
The study of public goods is intimately linked to the economic concept of [externality]. An [externality] can be thought of as an extra benefit (or cost) provided to others that results from some activity which may or may not be related to the externality. One example of an externality is the Global Positioning Satellite (GPS) system which individuals can use to help find their way in a new city or out in the wilderness. The original purpose of GPS was to provide navigation and targeting capabilities to the U.S. military. However, once the satellites were in orbit to provide the service to the military, consumer electronics firms started making GPS devices for everyday civilian use. The benefit provided to people around the globe who can find their way with GPS is an example of an externality, because it is a spillover benefit, or side-effect resulting from the GPS program implemented to benefit the military.
Pure public goods are held to be:
* non-rivalrous, meaning that anyone can benefit from them without diminishing their benefits to other people;
* non-excludable, meaning that no-one can be prevented from benefiting from them;
- and they are often:
* non-rejectable, meaning that nobody can avoid benefiting from them.<br>


An externality can also be something as simple as the enjoyment neigbors derive from a homeowner who keeps a neat lawn and garden. In this case the homeowner spends time and effort on mowing, fertilizer, etc... and neighbors derive utility in the form of higher property values, and their own enjoyment of living in a more aesthetically pleasing environment.
The term "club goods" is applied to products and services that are non-rivalous, but from which "non-members" are excluded.  


Externalities can be positive as well as negative. A good example of a negative externality is soot from a factory that makes it hard for people to breathe. The key feature of an externality is the difference between what the provider pays, and what the public receives. In the case of GPS, there is additional value provided to everyone who owns a GPS device not to mention the firms that produce and sell them at a profit) above and beyond what the US government pays for the value provided to the military, and in the case of pollution, the factory does not pay for the value of clean air that is lost by individuals who are affected by the soot.
The term "collective goods" is sometimes used to denote the broader category of products and services, including  both private goods and public goods, that are collectively financed.


Economic theory generally holds that if a good or service that conveys a positive externality, it will be underprovided. What this means is that individuals who value the externality would pay to get more of it than is provided at the [[market equilibrium]].  
==Rival interpretations==
The concept is often interpreted  to mean  that non-rivalrous and non-excludable products and services can only supplied by governments. That interpretation was challenged by Ronald Coase, who pointed out that English lighthouses had been privately supplied and financed in the 19th century<ref> Ronald Coase 1974. ''The Lighthouse in Economics'', Journal of Law and Economics, 17, no. 2, 1974</ref>. The broader interpretation adopted in this article follows Samuelson in  stipulating  only that they cannot be paid for by individual users  - implying that, unlike private goods, their supply cannot respond to the normal action of market forces. But it does not exclude  the possibility that they could be collectively financed by the private sector. It is widely assumed that the scope for the private sector financing of public goods must be  limited by  the opportunities it affords for "free-riding", but  Elinor Ostrom has demonstrated ways in which that obstacle can be overcome<ref>[http://www.apsanet.org/media/PDFs/PresidentialAddresses/1997AddrOSTROM.pdf Elinor Ostrom: ''A Behavioral Approach to the Rational Choice Theory of Collective Action'', Presidential Address to the American Political Science Association, 1997, American Political Science Association, Vol 92, No 1, 1998]</ref>. Public goods that are financed by the private sector are not in fact uncommon. Citizendium, for example,  is non-rivalous and  constitutionally non-excludable, and  is thus a public good although it is financed  by voluntary contributions from its supporters. It is nevertheless true that most public goods are government-financed, and in popular usage the term is often applied to government-financed products such as  those roads and bridges to which access is not restricted - although such usage is not consistent with the non-excludability criterion, nor with the fact that toll roads and bridges can be provided and financed by the private sector. Since, however, the distinction between public goods and the broader category of collective  goods depends upon the technical possibility of exclusion, it can be blurred by doubts concerning methods of exclusion that are possible but not available - or possible but not commercially feasible. Whether the global positioning system  should be categorised as a public good, for example, turns upon the feasibility of coded access.  


===The free-rider problem and the Tragedy of the Commons===
Some writers consider  government-financed products and services to have  private goods components if they confer particular benefits upon one section of the community (the patent system, for example, has been held to have a private goods component because it confers additional  benefits on inventors). Products and services need  not benefit everyone equally  for them to be defined as public goods but, even if  they are non-exclusive,  they  may seem to be akin to a transfer payment or a subsidy rather than a public good if they benefit only a segment of the community.


In most cases, when people want more of something and are willing to pay for it, the market generally responds by increasing production. In the case of those goods which are non-excludable, it may be difficult if not impossible for people to voluntarily pay for something which they can get for free.  
==Quasi-public goods==
The term "quasi-public goods" is sometimes applied to goods that are considered to be in some way intermediate between private goods and public goods. Examples include  goods, such as urban roads, for which rivalry among users varies with the degree  congestion  (and would include goods to which the degree of exclusion depends  upon the difficulty of access  if there were such goods). 
Another category  are  goods that are  under-supplied by the market when account is taken of "external benefits" for which  suppliers would not be  rewarded. Finally there are goods with increasing returns to scale or with high capital costs compared with their running costs, such as bridges and museums. For example the owner of a privately-financed toll bridge may be expected to reduce its usage below the economically optimum by charging motorists more than their marginal cost in order to recover the cost of its provision - a practice that is equivalent  to partial exclusion.


===Conclusion===
==Economic considerations==  
While a '''pure public good''' is ''strictly'' non-rivalrous and non-excludable, the more general usage of the term is that public goods should conform to both properties to a reasonable extent. For example if everyone tries to use a bridge at the same time, there will be a traffic jam, but the bridge is still considered a public good because once it has been built so that one person can use it, the [[marginal cost]] of allowing everyone to use it is zero.<ref>Hirshleifer, J and Hirshleifer, D (1997) ''Price Theory and Applications'' ISBN 0131907786</ref> Similarly, a tollbooth can be constructed to exclude people from using the bridge. Strictly speaking a bridge is a '''marketable public good''' or '''club good''', but because of the expense involved in collecting tolls, many bridges are operated by the government as public goods.
 
===References===
The economics of government-financed goods, including public and quasi-public goods, is considered further in the article on [[public expenditure]].
<references/>
 
==Global public goods==
 
The [[crash of 2008]] was a reminder that a stable, well-functioning international [[financial system]] is an important public good. Another example is the functioning of [[international law]] as a means of formalising relations between countries and settling international disputes.
 
==References==
<references/>[[Category:Suggestion Bot Tag]]

Latest revision as of 11:00, 8 October 2024

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Public goods are products and services that can only be collectively financed because it is not feasible to require individual users to pay for using them.

The origins of the concept

In the 18th century, Adam Smith wrote:

"The third and last duty of the sovereign or commonwealth is that of erecting or maintaining those public institutions and those public works, which, although they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could not repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain ."[1];

- in the 19th century, John Stuart Mill elaborated the idea, arguing as an example that it would be impossible to charge seamen according to their use of lighthouses

it is a proper office of government to build and maintain lighthouses, establish buoys, &c. for the security of navigation: for since it is impossible that the 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. [2];

- and in the 20th century, Paul Samuelson (who at first referred to public goods as "collective consumption goods") derived a formal proof of the proposition that "no decentralized pricing system can serve to determine optimally the levels of collective consumption" [3]

Defining characteristics

Pure public goods are held to be:

  • non-rivalrous, meaning that anyone can benefit from them without diminishing their benefits to other people;
  • non-excludable, meaning that no-one can be prevented from benefiting from them;

- and they are often:

  • non-rejectable, meaning that nobody can avoid benefiting from them.

The term "club goods" is applied to products and services that are non-rivalous, but from which "non-members" are excluded.

The term "collective goods" is sometimes used to denote the broader category of products and services, including both private goods and public goods, that are collectively financed.

Rival interpretations

The concept is often interpreted to mean that non-rivalrous and non-excludable products and services can only supplied by governments. That interpretation was challenged by Ronald Coase, who pointed out that English lighthouses had been privately supplied and financed in the 19th century[4]. The broader interpretation adopted in this article follows Samuelson in stipulating only that they cannot be paid for by individual users - implying that, unlike private goods, their supply cannot respond to the normal action of market forces. But it does not exclude the possibility that they could be collectively financed by the private sector. It is widely assumed that the scope for the private sector financing of public goods must be limited by the opportunities it affords for "free-riding", but Elinor Ostrom has demonstrated ways in which that obstacle can be overcome[5]. Public goods that are financed by the private sector are not in fact uncommon. Citizendium, for example, is non-rivalous and constitutionally non-excludable, and is thus a public good although it is financed by voluntary contributions from its supporters. It is nevertheless true that most public goods are government-financed, and in popular usage the term is often applied to government-financed products such as those roads and bridges to which access is not restricted - although such usage is not consistent with the non-excludability criterion, nor with the fact that toll roads and bridges can be provided and financed by the private sector. Since, however, the distinction between public goods and the broader category of collective goods depends upon the technical possibility of exclusion, it can be blurred by doubts concerning methods of exclusion that are possible but not available - or possible but not commercially feasible. Whether the global positioning system should be categorised as a public good, for example, turns upon the feasibility of coded access.

Some writers consider government-financed products and services to have private goods components if they confer particular benefits upon one section of the community (the patent system, for example, has been held to have a private goods component because it confers additional benefits on inventors). Products and services need not benefit everyone equally for them to be defined as public goods but, even if they are non-exclusive, they may seem to be akin to a transfer payment or a subsidy rather than a public good if they benefit only a segment of the community.

Quasi-public goods

The term "quasi-public goods" is sometimes applied to goods that are considered to be in some way intermediate between private goods and public goods. Examples include goods, such as urban roads, for which rivalry among users varies with the degree congestion (and would include goods to which the degree of exclusion depends upon the difficulty of access if there were such goods). Another category are goods that are under-supplied by the market when account is taken of "external benefits" for which suppliers would not be rewarded. Finally there are goods with increasing returns to scale or with high capital costs compared with their running costs, such as bridges and museums. For example the owner of a privately-financed toll bridge may be expected to reduce its usage below the economically optimum by charging motorists more than their marginal cost in order to recover the cost of its provision - a practice that is equivalent to partial exclusion.

Economic considerations

The economics of government-financed goods, including public and quasi-public goods, is considered further in the article on public expenditure.

Global public goods

The crash of 2008 was a reminder that a stable, well-functioning international financial system is an important public good. Another example is the functioning of international law as a means of formalising relations between countries and settling international disputes.

References