Public Goods


Two of the most controversial microeconomic roles of government are its role in providing public goods and its role in dealing with market failure due to externalities

Public Goods


Goods are either rivalrous or non-rivalrous , and are either excludable or non-excludable

Rivalrous goods are those which can be consumed by only one person at the same time -- for example, a candy bar or a suit;
non-rivalrous goods may be consumed by many at the same time at no additional cost -- for example, national defence or a piece of scientific knowledge.
An alternative definition is that a non-rivalrous good may be provided to more consumers at a very low marginal cost for each additional consumer. The alternative is correct, since even national defence takes additional resources for each person covered (it would be cheaper not to extend the area protected to Alaska and Hawaii) and disseminating scientific knowledge does take added expense in printing journals and books. However, the marginal cost is very low compared to the cost of establishing an army in the first place or of making the scientific discovery. The alternative does leave us with the question: how low is "low enough" to qualify a good as "public"?

Excludable goods are those for which one can at low cost prevent those who have not paid for the good from consuming it. You can require people to pay for a stamp before you deliver mail or pay for a ticket before they board a train; you cannot cheaply or easily prevent people from entering a park or from listening to a radio station.

Note that excludable goods are sometimes provided publicly (mail service) and non-excludable goods (radio and television) sometimes privately.

These two distinctions (rivalrous and excludable) provide us with four types of goods:
Types of goods
xxxx EXCLUDABLE NON-EXCLUDABLE
RIVALROUS PRIVATE GOODS (Candy bar) COMMON GOODS
(Fishing grounds)
NON-RIVALROUS PUBLIC ENTERPRISE GOODS
(TVA, mail, trains)
PURE PUBLIC GOODS
(National defense, court system)

Note especially the two categories NOT stressed by the textbook:

COMMON GOODS are those which are rivalrous in consumption but non-excludable . Fishing grounds provide a good example -- fish caught by one boat reduce the catch available for others, but it is difficult to exclude fishing boats from going where they please.
Often the problem with common goods is overuse -- overfishing, overuse of rivers or the air to discharge waste.
A step towards a solution is often to define property rights which had been left undefined because of a belief (perhaps justified at an earlier time) that such goods were non-rivalrous -- that the fishing grounds were inexhaustible or the river unpollutable.'

PUBLIC ENTERPRISE GOODS are those which are excludable and so could be privately provided, but which have low marginal costs of production and so are likely to be natural monopolies. Private provision runs the risk of monopoly and hence of underprovision; public provision is accordingly desirable.
Note that private provision is not impossible in these cases, so it is always debatable whether government should be in the business -- and the public choice school would argue that politicians and bureaucrats will always have an incentive to ensure their own employment by over-providing these goods.

It is not clear whether the government should provide mail service (UPS or Federal Express may do so more efficiently), train service (US freight service has become much more efficient since privatization), telecommunications (British Telecom again has become much more efficient since privatization), health service (from the European National Health Services to the US Medicare) or insurance services such as Social Security. Nor is it clear that the government should NOT provide these services; they are likely to be hotly debated political issues for the foreseeable future.