Public Goods

Public goods are goods or services with two properties: they are non-rival, meaning one person's use does not reduce the amount available to anyone else, and non-excludable, meaning it is impractical to stop people who have not paid from benefiting. National defence, a flood barrier protecting a town, basic scientific knowledge and a lighthouse beam are classic examples. In economics the term describes these technical features, not whether a good happens to be supplied by the government.

Because nobody can be made to pay for a benefit they will receive anyway, private firms usually supply too little of a public good, a leading cause of market failure. The shortfall comes from the free-rider problem. Public goods are related to, but distinct from, common-pool resources such as fisheries, which are non-excludable but rival and therefore prone to the tragedy of the commons.

Imagine a fireworks display over a city harbour. Once the rockets go up, everyone on the waterfront can watch, and one more spectator does not make the show any smaller for the others. Selling tickets would be pointless because anyone can look up at the sky for free.

That is why few businesses would put on such a display purely for profit, even if thousands of people would happily chip in a little. The value to the crowd is real, but there is no easy way to collect it. Public goods are the things that society wants but that are hard to sell one ticket at a time.

Economists sort goods by rivalry and excludability into four broad groups.

Many real goods are only partly public. A road is non-rival until it becomes congested, and technology can turn a public good into a club good: digital rights management and paywalls make it possible to exclude non-payers from software or news. Economists call goods that are mostly but not fully public "impure" public goods. A public good can be seen as an extreme case of a positive externality, in which the benefit of one provider spills over to everyone.

Paul Samuelson set out the efficiency rule for public goods in a 1954 paper, "The Pure Theory of Public Expenditure". Because everyone consumes the same unit, the right test is whether the sum of individual benefits covers the cost:

• $\text{MB}_i$ is the marginal benefit of one more unit of the good to person $i$.
• $n$ is the number of people who benefit.
• $\text{MC}$ is the marginal cost of providing that unit.

Suppose a new streetlight costs $100 a year to run and three households on the street value it at $40, $30 and $50. The total benefit is $120, which exceeds $100, so the light is worth installing. Yet no single household values it at $100, so none would pay the whole cost alone, and each has a reason to understate its valuation in the hope that the others will pay. This is why public goods are usually financed through taxation rather than voluntary purchase. A private good, by contrast, is efficient when each buyer's own marginal benefit equals marginal cost.

• Tax-funded provision. Most defence, policing, much infrastructure, public health and basic research is paid for through government spending decided by the public sector.
• Private provision with a twist. Broadcasters fund free-to-air content through advertising, and open-source software relies on volunteers and corporate sponsors.
• Legal exclusion. Patents and copyright, forms of intellectual property, create temporary exclusion over knowledge so that inventors can earn a return on research and development.
• Collective organisation. Elinor Ostrom, who shared the 2009 Nobel Prize in economics, documented many communities that provide shared goods through local rules rather than either the state or the market.

Some public goods cross borders. A stable climate, control of pandemics, and international financial stability benefit every country whether or not it contributes, which makes them especially hard to fund. International bodies such as the World Bank and the IMF are partly justified as suppliers of these goods. Within finance, economists sometimes describe a trustworthy monetary system, payment infrastructure and the stabilising role of central banks as public goods, because confidence in money benefits everyone who uses it.

Critics point out that "public good" is often used loosely to justify spending on things that are neither non-rival nor non-excludable. Ronald Coase's 1974 study of English lighthouses argued that ports had historically collected lighthouse dues from ships, showing that even a textbook public good could be financed privately once property rights to collect fees were secured; later historians have debated how far that example generalises. Public choice economists add that political processes may oversupply goods favoured by organised groups and undersupply others, so the case for public provision depends on the quality of the institutions doing the providing.

• The Nobel Prize: Economic Sciences 2009