Public Good Examples Of Public Goods Subtypes Of Public Goods

Public goods are "pure" when they possess these properties absolutely. Because empirically pure public goods are small in number (though they include such important cases as national defense and the system of property rights), in common parlance among economists the phrase "public goods" often refers to impure public goods or those confined to particular localities. A public good would be for society as a whole (the public), while a "collective good" is merely for a sub-set of society.

The public goods problem is that a free market is unlikely to produce the optimum amount of any public good: such important goods as national defense will be underproduced due to the free-rider problem . In practice, this problem has been solved through government intervention and the provision of public goods by the state. These solutions are not without their own critics, however, since there are some who have argued that they can lead to too many resources being allocated to a public good's production. In the case of national defense, this is the alleged problem of the military-industrial complex. Also, centralized governments are not the only substitute for markets: in theory, tradition and decentralized democracy might play a similar role.

Sometimes, in common parlance and political discourse, the term public good is used with the meaning of "goods provided by the government" or "goods the government ought to provide to the public". The subject of this article is the original technical term used by economists, not those alternative meanings.

A public good is the opposite of a private good, i.e., a good that can easily be divided into parts to sell on the market because it is excludable and rivalrous. For example, I can keep others from having my loaf of bread, while if I eat it, it is no longer available to others.

1 Examples of Public Goods

Common examples of public goods include "national defence" and law enforcement (including the system of property rights), public fireworks, lighthouseAn aid for navigation and pilotage at sea, a lighthouse is a tower building or framework sending out light from a system of lamps and lenses or, in older times, from a fire. More primitive navigational aids were once used such as a fire on top of a hill os, clean air and other environmental good s, and information goodInformation good in economics and law is a type commodity whose main market value derive from information it contains. It may also include services ( information services). The typical examples of information goods include a CD containing pieces of music,s such as wikipediaWikipedia is a multilingual " copyleft" encyclopedia designed to be read and edited by anyone. It is collaboratively edited and maintained by thousands of users via wiki software, and is hosted and supported by the non-profit Wikimedia Foundation. In addi, software development, authorshipAuthorship is the act of creating a work, idea or theory. Most of the time, this term refers to someone being the author of a written work. and inventionIn music, an invention is a short composition with two or three part counterpoint. See Invention (music An invention is a novel device or technique. One question that society often asks is, "What conditions lead to the development of an invention?" There.

The provision of a lighthouseAn aid for navigation and pilotage at sea, a lighthouse is a tower building or framework sending out light from a system of lamps and lenses or, in older times, from a fire. More primitive navigational aids were once used such as a fire on top of a hill o has often been used as the standard example of a public good, under the theory that it is difficult to exclude ships from using its services while no ship's use detracts from that of others. However, since in some cases, most of the benefit of a lighthouse accrues to ships using particular ports, lighthouse maintenance fees can profitably be bundled with port fees. This has been been sufficient to fund some actual lighthouses as private goods. However, since port fees themselves are much like taxes, this argument does not go against the theory of public goods completely.

The status of a public good may change over time. Technological progress can have a significant impact on excludability of traditional public goods: encryption allows broadcasters to sell individual access to their programming. The costs for electronic road pricing have fallen dramatically, paving the way for detailed billing based on actual use. On the other hand, technological progress can also create new public goods where none existed before. The simplest examples are street lights: they are relatively recent inventions (by historical standards), one person's enjoyment of them does not detract from other persons' enjoyment, and it is impossible to charge individuals separately for the amount of light they presumably use.

2 Subtypes of Public Goods

One of the most common way of looking at goods in economy, illustrated in the table below, is the classic division based on:

is there a competition involved in obtaining a given good
whether it is possible to exclude a person from consumption of a given good

Classic division of goods in economy		Exclusion from consumption (excludability)
Classic division of goods in economy		YES	NO
Competition in consumption (diminishability)	YES	private good: food, clothing, toys, furniture, cars	common good: natural environment
Competition in consumption (diminishability)	NO	club good: private schools, cinemas, clubs,	public good: national security ( army and police forces)

Sometimes, club and common goods are included in the broad definition of public goods. There are always some goods that can be argued to belong in more then one of those subcategories.

Common goods should not be confused with another subtype of public goods: the collective goods (or social goods), which are defined as goods that could be delivered as private goods, but are delivered instead by the government for various reasons (usually social policy).

3 The Free Rider Problem

Public goods provide a very important example of market failure, in which market-like behavior of individual gain-seeking does not produce efficient results. The production of public goods results in positive externalities which are not remunerated. Because no private organisation can reap all the benefits of a public good which they have produced, there will be insufficient incentives to produce it voluntarily. Consumers can take advantage of public goods without contributing sufficiently to their creation. This is called the free rider problem, or occasionally, the "easy rider problem" (because consumer's contributions will be small but non-zero).

For example, consider national defense, a standard example of a pure public good. A free-rider (also known as homo economicus) is an individual who is extremely individualistic, considering benefits and costs that affect only him or her. Suppose this individual thinks about exerting some extra effort to defend the nation. The benefits to the individual of this effort would be very low, since the benefits would be distributed among all of the millions of other people in the country. Further, there is a very high possibility that he could get injured or killed during the course of his or her military service. On the other hand, the free rider knows that he or she cannot be excluded from the benefits of national defense, regardless of whether he or she contributes to it. There is also no way that these benefits can be split up and distributed as individual parcels to people. So the free rider would not voluntarily exert any extra effort, unless there is some inherent pleasure or material reward for doing so (such as, for example, money paid by the government).

Finally, in the case of information goods, an inventor of a new product may benefit all of society. But hardly anyone is willing to pay for the invention if they can benefit from it for free.

4 Possible solutions to the Free Rider problem

4.1 Government Provision

If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. (Each of us is saved from our own individualistic short-sightedness.) One general solution to the problem is for governments or states to impose taxation to fund the production of public goods. The difficulty is to determine how much funding should be allocated to different public goods, and how the costs should be split (see resource allocation mechanism s, public finance). Ideally, these decisions should be made democratically following advice informed by economic theory.

Sometimes the government provides public goods using "unfunded mandates". An example is the requirement that every car be fit with a catalytic converter. This may be executed in the private sector, but the end result is predetermined by the state: the individually involuntary provision of the public good clean air. Unfunded mandates have also been imposed by the U.S. federal government on the state and local governments, as with the Americans with Disabilities Act, for example.

4.2 Subsidies

A government may subsidize production of a public good in the private sector. Unlike government provision, subsidies may result in some form of competitive market. The potential for cronyism (for example, an alliance between political insiders and the businesses receiving subsidies) can be limited with secret bidding for the subsidies or application of the subsidies following clear general principles. Depending on the nature of a public good and a related subsidy, principal agent problems can arise between the citizens and the government or between the government and the subsidized producers; this effect and counter-measures taken to address it can diminish the benefits of the subsidy.

Subsidies can also be used in areas with a potential for non-individualism: For instance, a state may subsidize devices to reduce air pollution and appeal to citizens to cover the remaining costs.

4.3 Privileged group

The study of collective action shows that public goods are still produced when one individual benefits more from the public good than it costs him to produce it; examples include benefits from individual use, intrinsic motivation to produce, and business models based on selling complement goods. A group that contains such individuals is called a privileged group.

An example of this could be Wikipedia, assuming that users derive more benefit from contributing than it costs them to do it. For more discussion on this topic see also Coase's Penguin.

4.4 Legislated Exclusion

Another solution, which has evolved for information goods, is to create intellectual property laws, such as copyright or patents, covering the public goods. These laws attempt to remove the natural non-excludability by prohibiting reproduction of the good. Although they can solve the free rider problem, the downside of these laws is that they are not Pareto optimal. For example, in the United States, the patent rights given to pharmaceutical companies encourage them to charge high prices (above marginal cost), to advertise to convince patients to nag their doctors to prescribe the drugs, to sue even mild imitators in court, and to lobby for the extension of patent rights. (See rent seeking.)

This near-ubiquitous problem arises because the underlying marginal cost of giving the good to more people is low or zero, but, because of the limits of price discrimination (including both arbitrage and a lack of incentives to provide cheap, high quality copies to those with little ability to pay), those who are unwilling or unable to pay a profit-maximising price, do not get access to the good.

Joseph Schumpeter claimed that the "excess profits" generated by the copyright or patent monopoly will attract competitors that will make technological innovations and thereby end the monopoly. This is a continual process referred to as "Schumpeterian creative destruction", and its applicability to different types of public goods is a source of some controversy. The supporters of the theory point to the case of Microsoft, for example, which has been increasing its prices (or lowering its products' quality), and predict that these practices will make increased market shares for Linux and Macintosh largely inevitable.

4.5 Non-individualism

If enough people do not think like free-riders, the private and voluntary provision of public goods may be successful. A free rider might litter in a public park, but a more public-spirited individual would not do so, getting an inherent pleasure from helping the community. In fact, a public-spirited person might voluntarily pick up some of the existing litter. If enough people do so, the role of the state in using taxes to hire professional maintenance crews is reduced. This might imply that even a free-rider would not litter, since his or her action would have such an obvious cost.

This kind of public spirit ( nationalism, patriotism, or national chauvinism or sometimes religious or ethnic unity) has been part of most successful war efforts, complementing the roles of taxation and conscription. To some extent, public spiritedness of a more limited type is the basis for voluntary contributions that support public radio and TV. Contributions to Wikipedia can also be seen to represent an example of such public spiritedness, since Wikipedia provides a public good (information) freely to all readers.

5 See also

Economics

6 External links

Are education and transportation public goods?

<Hide>

Home > Public good