Public and Private Goods

Public goods, by way of contrast, cannot be efficiently traded through markets. They are termed public goods because governments (or the public sector) are responsible for their efficient provision. The term public good can be narrowly defined to include goods characterized by nonrival consumption (consumption by one person does not prevent consumption by another) and nonexcludability (people who do not pay cannot be prevented from gaining access to the good).

On occasion, the term public good is also more generally used to include two other goods that have one, but not both of these characteristics. Near-public goods have nonrival consumption, but excludability. Common-property goods have rival consumption, but nonexcludability. All three types of goods--public goods (pure), near-public goods, and common-property goods--can be efficiently produced and allocated only through government involvement. The nature of these goods help to explain the basic functions of government.

The Basic Functions

• Common Defense: In all likelihood distant ancestors established the first governments for the expressed, exclusive purpose of protecting their fledgling civilizations from external threats (wild animals, enemy tribes). Because such common defense provides benefits to every member of society without exception, once it is provided (nonexcludability) and because the protection of one member of society does not prevent the protection of other members (nonrival consumption) it is a prime example of a public good.


• Education: Governments are also heavily involved in the provision of education, including public schools, higher education, and assorted job training programs. While education provides benefits to those educated with improved productivity and higher incomes, it also benefits the whole of society with less crime, technological advances, and fewer social problems. As such, while nonpayers can be excluded from gaining access to education (excludability), improved education benefits everyone (nonrival consumption), making this a near-public good that cannot be efficiently provided through private markets.


• Transportation: Transportation systems, including urban streets, interstate highways, subways, buses, railroads, and air transit, are similar to education. Transportation, like education provides, benefits to those using the systems, and it also benefits the whole of society with improved efficient use of resources and lower production cost. While nonpayers can be excluded from gaining access to transportation (excludability), transportation provides benefits throughout society (nonrival consumption), making this a near-public good that cannot be efficiently provided through private markets.


• Public Health and Safety: Governments also devote a lot of effort to public health and safety, including fire protection, police protection, disease control, and environmental quality. Public health and safety is another type activity that provides direct benefits to some people with immunization shots and clean drinking water, but it also benefits the rest of society with longer lifespans, fewer contagious diseases, and safer streets. As such, while nonpayers can be excluded from gaining access to public health and safety (excludability), improved public health and safety benefits everyone (nonrival consumption), making this another near-public good that cannot be efficiently provided through private markets.


• Legal and Judicial System: A legal and judicial system that establishes the "rules of the game" is also critical to the efficient operation of an economy. In particular, the efficient exchange of private goods through competitive markets cannot take place without a well-defined system of property rights. If no one "owns" resources and goods, then ownership cannot be exchanged through markets. A government-run legal and judicial system is the only way to maintain property rights.


• Money: Government is also needed to maintain the value and stability of the money supply. If an economy has too much or too little money in circulation, then the economy can have inflation and unemployment problems. If left exclusively to private banks, the profit motivation is most likely to create financial and economic turmoil.

But, An Imperfect World