Public goods include knowledge, official statistics, national security, common language(s), flood control systems, lighthouses, and street lighting. Public goods that are available everywhere are sometimes referred to as global public goods. There is an important conceptual difference between the sense of "a" public good, or public "goods" in economics, and the more generalized idea of "the public good" (or common good, or public interest), "a shorthand signal for shared benefit at a societal level".
Many public goods may at times be subject to excessive use resulting in negative externalities affecting all users; for example air pollution and traffic congestion. Public goods problems are often closely related to the "free-rider" problem, in which people not paying for the good may continue to access it. Thus, the good may be under-produced, overused or degraded. Public goods may also become subject to restrictions on access and may then be considered to be club goods or private goods; exclusion mechanisms include copyright, patents, congestion pricing, and pay television.
There is a good deal of debate and literature on how to measure the significance of public goods problems in an economy, and to identify the best remedies.
In a non-economic sense, the term is often used to describe something that is useful for the public generally, such as education and infrastructure, although these are not "public goods" in the economic sense.
Terminology, and types of goods
Paul A. Samuelson is usually credited as the first economist to develop the theory of public goods. In his classic 1954 paper The Pure Theory of Public Expenditure, he defined a public good, or as he called it in the paper a "collective consumption good", as follows:
[goods] which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good...
This is the property that has become known as non-rivalry. A pure public good exhibits a second property called non-excludability: that is, it is impossible to exclude any individuals from consuming the good.
However, many goods may satisfy the two public good conditions (non-rivalry and non-excludability) only to a certain extent or only some of the time. These goods are known as impure public goods.
The opposite of a public good is a private good,
which does not possess these properties. A loaf of bread, for example,
is a private good; its owner can exclude others from using it, and once
it has been consumed, it cannot be used again.
A good that is rivalrous but non-excludable is sometimes called a common-pool resource. Such goods raise similar issues to public goods: the mirror to the public goods problem for this case is the 'tragedy of the commons'. For example, it is so difficult to enforce restrictions on deep-sea fishing that the world's fish stocks can be seen as a non-excludable resource, but one which is finite and diminishing.
Definition matrix
|
|
Excludable | Non-excludable |
| Rivalrous | Private goods food, clothing, cars, parking spaces |
Common-pool resources fish stocks, timber, coal |
| Non-rivalrous | Club goods cinemas, private parks, satellite television |
Public goods free-to-air television, air, national defense |
Elinor Ostrom
proposed additional modifications to the classification of goods to
identify fundamental differences that affect the incentives facing
individuals
(1) Replacing the term "rivalry of consumption" with "subtractability of
use".
(2) Conceptualizing subtractability of use and excludability to vary
from low to high rather than characterizing them as either present or
absent.
(3) Overtly adding a very important fourth type of good—common-pool
resources—that shares the attribute of subtractability with private
goods and difficulty of exclusion with public goods. Forests, water
systems, fisheries, and the global atmosphere are all common-pool
resources of immense importance for the survival of humans on this
earth.
(4) Changing the name of a "club" good to a "toll" good since many goods
that share these characteristics are provided by small scale public as
well as private associations.
Challenges in identifying public goods
The
definition of non-excludability states that it is impossible to exclude
individuals from consumption. Technology now allows radio or TV
broadcasts to be encrypted such that persons without a special decoder
are excluded from the broadcast. Many forms of information goods
have characteristics of public goods. For example, a poem can be read
by many people without reducing the consumption of that good by others;
in this sense, it is non-rivalrous. Similarly, the information in most
patents can be used by any party without reducing consumption of that
good by others. Official statistics
provide a clear example of information goods that are public goods,
since they are created to be non-excludable. Creative works may be
excludable in some circumstances, however: the individual who wrote the
poem may decline to share it with others by not publishing it. Copyrights and patents
both encourage the creation of such non-rival goods by providing
temporary monopolies, or, in the terminology of public goods, providing a
legal mechanism to enforce excludability for a limited period of time.
For public goods, the "lost revenue" of the producer of the good is not
part of the definition: a public good is a good whose consumption does
not reduce any other's consumption of that good.
Debate has been generated among economists whether such a category of "public goods" exists. Steven Shavell has suggested the following:
...when professional economists talk about public goods they do not mean that there are a general category of goods that share the same economic characteristics, manifest the same dysfunctions, and that may thus benefit from pretty similar corrective solutions...there is merely an infinite series of particular problems (some of overproduction, some of underproduction, and so on), each with a particular solution that cannot be deduced from the theory, but that instead would depend on local empirical factors.
Common confusion is that public goods are goods provided by the public sector.
Although it is often the case that government is involved in producing
public goods, this is not necessarily the case. Public goods may be naturally available. They may be produced by private individuals and firms, by non-state collective action, or they may not be produced at all.
The theoretical concept of public goods does not distinguish with
regard to the geographical region in which a good may be produced or
consumed. However, some theorists such as Inge Kaul use the term "global public good"
for public goods which is non-rival and non-excludable throughout the
whole world, as opposed to a public good which exists in just one
national area. Knowledge has been held to be an example of a global
public good, but also as a commons, the knowledge commons.
Aggregate demand (ΣMB) is the sum of individual demands (MBi)
Graphically, non-rivalry means that if each of several individuals
has a demand curve for a public good, then the individual demand curves
are summed vertically to get the aggregate demand curve for the public
good. This is in contrast to the procedure for deriving the aggregate
demand for a private good, where individual demands are summed
horizontally.
Social goods
Social goods are defined as public goods that could be delivered as private goods, but are usually delivered by the government for various reasons, including social policy, and funded via public funds
like taxes. Note that some writers have used the term "public good" to
refer only to non-excludable "pure public goods" and refer to excludable
public goods as "club goods".
Examples
Common examples of public goods include: defense, public fireworks, lighthouses, clean air and other environmental goods, and information goods, such as official statistics, software development, authorship, and invention. Some goods, like orphan drugs,
require special governmental incentives to be produced, but cannot be
classified as public goods since they do not fulfill the above
requirements (non-excludable and non-rivalrous.) Law enforcement,
streets, libraries, museums, and education are commonly misclassified as
public goods, but they are technically classified in economic terms as
quasi-public goods because excludability is possible, but they do still fit some of the characteristics of public goods.
The provision of a lighthouse
is a standard example of a public good, since it is difficult to
exclude ships from using its services. No ship's use detracts from that
of others, but since most of the benefit of a lighthouse accrues to
ships using particular ports, lighthouse maintenance can be profitably bundled with port fees (Ronald Coase, The Lighthouse in Economics 1974). This has been sufficient to fund actual lighthouses.
Technological progress
can create new public goods. The most simple examples are street
lights, which are relatively recent inventions (by historical
standards). One person's enjoyment of them does not detract from other
persons' enjoyment, and it currently would be prohibitively expensive to
charge individuals separately for the amount of light they presumably
use. Official statistics
are another example. The government's ability to collect, process and
provide high-quality information to guide decision-making at all levels
has been strongly advanced by technological progress. On the other hand,
a public good's status may change over time. Technological progress can
significantly impact 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.
Some question whether defense is a public good. Murray Rothbard argues:
'national defense' is surely not an absolute good with only one unit of supply. It consists of specific resources committed in certain definite and concrete ways—and these resources are necessarily scarce. A ring of defense bases around New York, for example, cuts down the amount possibly available around San Francisco.
Jeffrey Rogers Hummel and Don Lavoie note,
Americans in Alaska and Hawaii could very easily be excluded from the U.S. government's defense perimeter, and doing so might enhance the military value of at least conventional U.S. forces to Americans in the other forty-eight states. But, in general, an additional ICBM in the U.S. arsenal can simultaneously protect everyone within the country without diminishing its services.
Public goods are not restricted to human beings. It is one aspect of the study of cooperation in biology.
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. If private organizations do not reap all the
benefits of a public good which they have produced, their incentives to
produce it voluntarily might be insufficient. 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 consumers'
contributions will be small but non-zero). If too many consumers decide
to "free-ride", private costs exceed private benefits and the incentive
to provide the good or service through the market disappears. The market
thus fails to provide a good or service for which there is a need.
The free rider problem depends on a conception of the human being as homo economicus:
purely rational and also purely selfish—extremely individualistic,
considering only those benefits and costs that directly affect him or
her. Public goods give such a person an incentive to be a free rider.
For example, consider national defense, a standard example of a pure public good. Suppose homo economicus
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. There is also a very high possibility that he or she
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. The free
rider would not voluntarily exert any extra effort, unless there is some
inherent pleasure or material reward for doing so (for example, money
paid by the government, as with an all-volunteer army or mercenaries).
The free-riding problem is even more complicated than it was thought to
be until recently. Any time non-excludability results in failure to
pay the true marginal value (often called the "demand revelation
problem"), it will also result in failure to generate proper income
levels, since households will not give up valuable leisure if they
cannot individually increment a good.
This implies that, for public goods without strong special interest
support, under-provision is likely since benefit-cost analyses are being
conducted at the wrong income levels, and all of the ungenerated income
would have been spent on the public good, apart from general
equilibrium considerations.
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. In the case of an information good, however, because of its
characteristics of non-excludability and also because of almost zero
reproduction costs, commoditization is difficult and not always
efficient even from a neoclassical economic point of view.
Economic and political solutions
Assurance contracts
An assurance contract
is a contract in which participants make a binding pledge to contribute
to building a public good, contingent on a quorum of a predetermined
size being reached. Otherwise the good is not provided and any monetary
contributions are refunded.
A dominant assurance contract
is a variation in which an entrepreneur creates the contract and
refunds the initial pledge plus an additional sum of money if the quorum
is not reached. (The entrepreneur profits by collecting a fee if the
quorum is reached and the good is provided.) In game-theoretic
terms this makes pledging to build the public good a dominant strategy:
the best move is to pledge to the contract regardless of the actions of
others.
Coasian solution
A Coasian solution, named for the economist Ronald Coase,
proposes that potential beneficiaries of a public good can negotiate to
pool their resources and create it, based on each party's
self-interested willingness to pay. His treatise, "The Problem of
Social Cost" (1960), argued that if the transaction costs
between potential beneficiaries of a public good are low—that it is
easy for potential beneficiaries to find each other and organize a
pooling their resources based upon the good's value to each of them—that
public goods could be produced without government action.
Much later, Coase himself wrote that while what had become known as the
Coase Theorem had explored the implications of zero transaction costs,
he had actually intended to use this construct as a stepping-stone to
understand the real world of positive transaction costs, corporations,
legal systems and government actions:
I examined what would happen in a world in which transaction costs were assumed to be zero. My aim in doing so was not to describe what life would be like in such a world but to provide a simple setting in which to develop the analysis and, what was even more important, to make clear the fundamental role which transaction costs do, and should, play in the fashioning of the institutions which make up the economic system.
Coase also wrote:
The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave. What I did in "The Problem of Social Cost" was simply to shed light on some of its properties. I argued in such a world the allocation of resources would be independent of the legal position, a result which Stigler dubbed the "Coase theorem".
Thus,
while Coase himself appears to have considered the "Coase theorem" and
Coasian solutions as simplified constructs to ultimately consider the
real 20th-century world of governments and laws and corporations, these
concepts have become attached to a world where transaction costs were
much lower, and government intervention would unquestionably be less
necessary.
A minor alternative, especially for information goods, is for the
producer to refuse to release a good to the public until payment to
cover costs is met. Author Stephen King,
for instance, authored chapters of a new novel downloadable for free on
his website while stating that he would not release subsequent chapters
unless a certain amount of money was raised. Sometimes dubbed holding for ransom, this method of public goods production is a modern application of the street performer protocol
for public goods production. Unlike assurance contracts, its success
relies largely on social norms to ensure (to some extent) that the
threshold is reached and partial contributions are not wasted.
One of the purest Coasian solutions today is the new phenomenon of Internet crowdfunding. Here rules are enforced by computer algorithms and legal contracts as well as social pressure. For example, on the Kickstarter
site, each funder authorizes a credit card purchase to buy a new
product or receive other promised benefits, but no money changes hands
until the funding goal is met.
Because automation and the Internet so reduce the transaction costs for
pooling resources, project goals of only a few hundred dollars are
frequently crowdfunded, far below the costs of soliciting traditional
investors.
Government provision
If
voluntary provision of public goods will not work, then the solution is
making their provision involuntary. This saves each of us from our own
tendency to be a free rider, while also assuring us that no one else
will be allowed to free ride. One frequently proposed solution to the
problem is for governments or states to impose taxation to fund the production of public goods. This does not actually solve the theoretical problem because good government
is itself a public good. Thus it is difficult to ensure the government
has an incentive to provide the optimum amount even if it were possible
for the government to determine precisely what amount would be optimum.
These issues are studied by public choice theory and public finance.
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.
Regardless, some argue that the role of the government is to
provide vital goods to all individuals, some of which they cannot obtain
privately. In order to ensure that government services are properly funded taxes are imposed.
Although enforced taxes deter the free-rider problem, many contend that
some goods should be excluded and provided privately. However, this is
not possible with all goods such as pure public goods that are
inseparable and inclusive, thus arguably requiring "provision by public
means".
Subsidies and joint products
A government may subsidize production of a public good in the private sector. Unlike government provision, subsidies may result in some form of a 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.
Similarly, a joint-product model analyzes the collaborative
effect of joining a private good to a public good. For example, a tax
deduction (private good) can be tied to a donation to a charity
(public good). It can be shown that the provision of the public good
increases when tied to the private good, as long as the private good is
provided by a monopoly (otherwise the private good would be provided by
competitors without the link to the public good).
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.
A historical example could be a downtown entrepreneur who erects a
street light in front of his shop to attract customers; even though
there are positive external benefits to neighboring nonpaying
businesses, the added customers to the paying shop provide enough
revenue to cover the costs of the street light.
The existence of privileged groups may not be a complete solution to the free rider problem, however, as underproduction
of the public good may still result. The street light builder, for
instance, would not consider the added benefit to neighboring businesses
when determining whether to erect his street light, making it possible
that the street light isn't built when the cost of building is too high
for the single entrepreneur even when the total benefit to all the
businesses combined exceeds the cost.
An example of the privileged group solution could be the Linux
community, 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.
Another example is those musicians and writers who create music
and writings for their own personal enjoyment, and publish because they
enjoy having an audience. Financial incentives are not necessary to
ensure the creation of these public goods. Whether this creates the
correct production level of writings and music is an open question.
Merging free riders
Another
method of overcoming the free rider problem is to simply eliminate the
profit incentive for free riding by buying out all the potential free
riders. A property developer that owned an entire city street, for
instance, would not need to worry about free riders when erecting street
lights since he owns every business that could benefit from the street
light without paying. Implicitly, then, the property developer would
erect street lights until the marginal social benefit met the marginal
social cost. In this case, they are equivalent to the private marginal
benefits and costs.
While the purchase of all potential free riders may solve the
problem of underproduction due to free riders in smaller markets, it may
simultaneously introduce the problem of underproduction due to monopoly.
Additionally, some markets are simply too large to make a buyout of all
beneficiaries feasible—this is particularly visible with public goods
that affect everyone in a country.
Introducing an exclusion mechanism (club goods)
Another solution, which has evolved for information goods, is to introduce exclusion mechanisms which turn public goods into club goods. One well-known example is copyright and patent laws. These laws, which in the 20th century came to be called intellectual property
laws, attempt to remove the natural non-excludability by prohibiting
reproduction of the good. Although they can address the free rider
problem, the downside of these laws is that they imply private monopoly
power and thus 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) and to advertise to convince patients to persuade their doctors to prescribe the drugs. Likewise, copyright provides an incentive for a publisher to act like The Dog in the Manger, taking older works out of print so as not to cannibalize revenue from the publisher's own new works.
The laws also end up encouraging patent and copyright owners to sue
even mild imitators in court and to lobby for the extension of the term
of the exclusive rights in a form of rent seeking.
These problems with the club-good mechanism arise because the underlying marginal cost of giving the good to more people is low or zero, but, because of the limits of price discrimination those who are unwilling or unable to pay a profit-maximizing price do not gain access to the good.
If the costs of the exclusion mechanism are not higher than the gain from the collaboration, club goods can emerge naturally. James M. Buchanan showed in his seminal paper that clubs can be an efficient alternative to government interventions.
On the other hand, the inefficiencies and inequities of club
goods exclusions sometimes cause potentially excludable club goods to be
treated as public goods, and their production financed by some other
mechanism. Examples of such "natural" club goods include natural monopolies
with very high fixed costs, private golf courses, cinemas, cable
television and social clubs. This explains why many such goods are
often provided or subsidized by governments, co-operatives or volunteer
associations, rather than being left to be supplied by profit-minded
entrepreneurs. These goods are often known as social goods.
Joseph Schumpeter
claimed that the "excess profits", or profits over normal profit,
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), predicting that these practices will
make increased market shares for Linux and Apple largely inevitable.
A nation can be seen as a club whose members are its citizens.
Government would then be the manager of this club. This is further
studied in the Theory of the State.
Altruistic solutions
Social norms
When
enough people do not think like free-riders, the private and voluntary
provision of public goods may be successful. For example, a free rider
might come to a public park to enjoy its beauty, yet discard litter that
makes it less enjoyable for others. Other public-spirited individuals
don't do this and might even pick up existing litter. Reasons for the
act could be that the person derives pleasure from helping their
community, feels ashamed if their neighbors or friends saw them, or
could be emotionally attached to the public good. People unconsciously
adapt their behavior to that of their peers; this is conformity. Even people who engaged in free-riding by littering elsewhere are less likely to if they see others hold on to their trash.
Social norms can be observed wherever people interact, not only
in physical spaces but in virtual communities on the Internet. For
example, if a disabled person boards a crowded bus, everyone expects
that some able-bodied person will volunteer their seat. The same social
norm, although executed in a different environment, can also be applied
to the Internet. If a user enters a discussion in a chat room and
continues to use all capital letters or to make personal attacks
("flames") when addressing other users, the culprit may realize he or
she has been blocked by other participants. As in real life, users
learning to adapt to the social norms of cyberspace communities provide a
public good—here, not suffering disruptive online behavior—for all the
participants.
Social sanctions (punishment)
Experimental
literature suggests that free riding can be overcome without any state
intervention. Peer-to-peer punishment, that is, members sanction those
members that do not contribute to the public good at a cost, is
sufficient to establish and maintain cooperation.
Such punishment is often considered altruistic, because it comes at a
cost to the punisher, however, the exact nature remains to be explored. Whether costly punishment can explain cooperation is disputed.
Recent research finds that costly punishment is less effective in real
world environments. For example, punishment works relatively badly under
imperfect information, where people cannot observe the behavior of
other perfectly.
Voluntary organizations
Organizations such as the Red Cross, public radio and television or a volunteer fire department
provide public goods to the majority at the expense of a minority who
voluntarily participate or contribute funds. Contributions to online
collaborative media like Wikipedia and other wiki projects, and free software projects such as Linux
are another example of relatively few contributors providing a public
good (information) freely to all readers or software users.
Proposed explanations for altruistic behavior include biological altruism and reciprocal altruism.
For example, voluntary groups such as labor unions and charities often
have a federated structure, probably in part because voluntary
collaboration emerges more readily in smaller social groups than in
large ones (e.g., see Dunbar's number).
While both biological and reciprocal altruism are observed in
other animals, our species' complex social behaviors take these raw
materials much farther. Philanthropy by wealthy individuals—some, such as Andrew Carnegie
giving away their entire vast fortunes—have historically provided a
multitude of public goods for others. One major impact was the Rockefeller Foundation's development of the "Green Revolution" hybrid grains that probably saved many millions of people from starvation in the 1970s. Christian missionaries,
who typically spend large parts of their lives in remote, often
dangerous places, have had disproportionate impact compared with their
numbers worldwide for centuries. Communist revolutionaries in the 20th century had similar dedication and outsized impacts. International relief organizations such as Doctors Without Borders, Save the Children and Amnesty International
have benefited millions, while also occasionally costing workers their
lives. For better and for worse, humans can conceive of, and sacrifice
for, an almost infinite variety of causes in addition to their
biological kin.
Religions and ideologies
"The noblest motive is the public good." Thomas Jefferson Building, Library of Congress.
Voluntary altruistic organizations often motivate their members by
encouraging deep-seated personal beliefs, whether religious or other
(such as social justice or environmentalism) that are taken "on faith"
more than proved by rational argument. When individuals resist
temptations to free riding (e.g., stealing) because they hold these
beliefs (or because they fear the disapproval of others who do), they
provide others with public goods that might be difficult or impossible
to "produce" by administrative coercion alone.
One proposed explanation for the ubiquity of religious belief in human societies is multi-level selection:
altruists often lose out within groups, but groups with more altruists
win. A group whose members believe a "practical reality" that motivates
altruistic behavior may out-compete other groups whose members'
perception of "factual reality" causes them to behave selfishly. A
classic example is a soldier's willingness to fight for his tribe or
country. Another example given in evolutionary biologist David Sloan Wilson's Darwin's Cathedral is the early Christian church under the late Roman Empire; because Roman society was highly individualistic, during frequent epidemics many of the sick died not of the diseases per se
but for lack of basic nursing. Christians, who believed in an
afterlife, were willing to nurse the sick despite the risks. Although
the death rate among the nurses was high, the average Christian had a much better chance of surviving an epidemic than other Romans did, and the community prospered.
Religious and non-religious traditions and ideologies (such as nationalism and patriotism)
are in full view when a society is in crisis and public goods such as
defense are most needed. Wartime leaders invoke their God's protection
and claim that their society's most hallowed traditions are at stake.
For example, according to President Abraham Lincoln's Gettysburg Address during the American Civil War,
the Union was fighting so "that government of the people, by the
people, for the people, shall not perish from the earth". Such
voluntary, if exaggerated, exhortations complement forcible
measures—taxation and conscription—to motivate people to make sacrifices
for their cause.
Efficient production levels of public goods
The Pareto optimum provision of a public good in a society is where the combined sum of the marginal rate of substitution between private goods and a given public good of all individuals is equal to the marginal rate of transformation.
This contrasts to the Pareto optimality condition of private goods, in
which each consumers' marginal rate of substitution is equal; as is the
societies marginal rate of transformation.
An example is a community of just two consumers and the government is considering whether or not to build a public park.
One person is prepared to pay up to $200 for its use, while the other
is willing to pay up to $100. The total value to the two individuals of
having the park is $300. If it can be produced for $225, there is a $75
gain on its production since it provides services that the community
values at $300 at a cost of only $225.
Regardless of the method of providing public goods, the efficient
level of such provision is still being subjected to economic analysis.
For instance, the Samuelson condition calculates the efficient level of public goods production to be where the ratio of the marginal social cost of public and private goods production equals the ratio of the marginal social benefit of public and private goods production.
Ownership
An
important question regarding public goods is whether they should be
owned by the public or the private sector. Economic theorists such as Hart (1995) argue that ownership matters for investment incentives when contracts are incomplete. The incomplete contracting paradigm has been applied to public goods by Besley and Ghatak (2001).
They consider the government and a non-governmental organization (NGO)
who can both make investments to provide a public good. Besley and
Ghatak show that the party who has a larger valuation for the public
good should be the owner, regardless of whether the government or the
NGO has a better investment technology. This result contrasts with the
case of private goods studied by Hart (1995), where the party with the
better investment technology should be the owner. However, more recently
it has been shown that the investment technology matters also in the
public-good case when a party is indispensable or when there are
bargaining frictions between the government and the NGO.
