Public Goods

The exhibit to the right illustrates the four alternative types of goods -- private, public, common-property, and near-public -- based on the mix of consumption rivalry and nonpayer excludability. Public goods are in the lower left cell of the matrix, with nonrival consumption and the inability to exclude nonpayers.

Public goods do not have well-defined property rights meaning they are, in essence, owned by everyone. But such "public" ownership is okay because every member of the public can benefit from simultaneously consuming the goods. This public or joint ownership of public goods means they cannot be exchanged through markets. The only efficient way to provide public goods is through governments. The prime example of a public good is national defense. Every member of society benefits when the country is protected from foreign attack and nonpayers can not be excluded from this protection. Other common public goods includes public health and environmental quality. Many, not all but many, of the services provided by governments (the "public" sector) fall in the category of public goods.

A prime reason that public goods must be provided by governments is the free-rider problem. The free-rider problem arises because people are able to enjoy the benefits of a good without paying. As such, they have no compelling reason to voluntarily pay for public goods as they have with private goods. This is a problem for the efficient allocation of resources.

Some Public Examples

Nonrival Consumption

Suppose, for example, that Edgar Millbottom is protected from foreign invasion by the combined military forces of the United States government. The benefit that Edgar derives from this public good does not prevent others from also benefitting. Everyone residing in the country is protected from foreign invasion equally. More to the point, the protection extended to Edgar does exclude his friend Alicia Hyfield from protection, Edgar's consumption of national defense DOES NOT impose an opportunity cost on anyone else.

With nonrival consumption, efficiency is best achieved when everyone in society is allowed to consume the good, without restriction. Price is one restriction that might prevent consumption. According to the basic law of demand, the higher the price, the fewer the consumers. Because opportunity cost of consumption is zero, efficiency dictates that the price is also zero.

However, the opportunity cost of production is most certainly NOT zero. Resources, that could be used to produce other goods, are used for the production of public goods. The best (that is, efficient) way to finance the production and provision of public goods is through general tax revenue, taxes that are unrelated to consumption. This is just the sort of provision that governments are very good at doing.

Nonpayer Nonexcludability

Again, let's turn to Edgar Millbottom's protection from foreign invasion. His friend and fellow citizen, Alicia Hyfield, cannot be excluded from also receiving the benefits of protection, even if she does not pay. Whether Alicia pays or not, she is protected. Whether Edgar pays or not, he is protected. Anyone, everyone, living in the country is protected and such protection cannot be withheld from nonpayers.

With nonpayer nonexcludability, public goods cannot be exchanged through markets. They can be provided only by governments.

Governments to the Rescue

It's almost as if society created governments for the expressed purpose of providing public goods. As a matter of facts, society DID create governments for the expressed purpose of providing public goods.

The Free-Rider Problem

Consider the case of national defense. By design, national defense protects EVERY member of society. If the country is protected from enemy attack, then EVERYONE is protected from enemy attack. There is no discrimination based on who pays and who does not. As such, voluntary payment for this good is unlikely to generate sufficient revenue to finance production. The inability to exclude nonpayers means that nonpayers can ride the benefits for free.

Suppose, for example, that Roland Nottingham's "voluntary" payment for his share of national defense is $100. If Roland spends $100 on national defense, then he receives national defense. However, if he decides to spend this $100 on a private good such as a rocking chair for his front porch (ideal for yelling at neighborhood kids), then he can have both the rocking chair and national defense. He's better off spending his $100 on the rocking chair then riding the benefits of national defense for free.

The problem arises because everyone else is bound to think the same way. The voluntary payment for national defense will not generate sufficient revenue to pay for production. As such, the only way to pay for such goods is through coerced or forced payments, that is government taxes.

The Market Demand for Public Goods

Public Good Demand

Because the consumption by one person does not prevent the consumption by another, the value society receives from a public good is the sum of the value received by all who enjoy the benefits. This means that the demand for public goods is based on the vertical summation of individual demand curves. The demand for private goods, in contrast, is based on the horizontal summation of individual demand curves.

Let's consider two buyers, Pollyanna and Duncan, who are consuming a public good, such as national defense. The focus of attention is on the price each buyer would be willing to pay for a given quantity of the good. Suppose that Pollyanna is willing and able to pay $1 for a given level of defense (2 fighter jets) and Duncan is willing and able to pay $3 for this level.

The total "market demand" is the sum of the prices that each is willing to pay, which is $4 ($1 + $3). The "market demand" curve is then derived by summing the prices that these two buyers would be willing and able to pay for different quantities. The "market demand" curve is the vertical summation of the individual demand curves of Pollyanna and Duncan. The prices are vertically summed for a given quantity. Click the [Public Demand] button to illustrate this derivation. The comparable market demand for a private good can be illustrated by clicking the [Private Demand] button.

Three Other Goods

• Private: Private goods are characterized by rival consumption and the ability to exclude nonpayers. Private goods can be easily, effectively, and efficiently exchanged through markets.


• Common-Property: Common-property goods are characterized by rival consumption and the inability to exclude nonpayers. These goods can not be efficiently exchanged through markets and governments are often called upon to control or regulate their use.


• Near-Public: Near-public goods are characterized by nonrival consumption and the ability to exclude nonpayers. These goods are often exchanged through markets, but are more efficiently provided by governments.