By Tyler Cowen
Public goods have two distinct aspects: nonexcludability and nonrivalrous consumption. “Nonexcludability” means that the cost of keeping nonpayers from enjoying the benefits of the good or service is prohibitive. If an entrepreneur stages a fireworks show, for example, people can watch the show from their windows or backyards. Because the entrepreneur cannot charge a fee for consumption, the fireworks show may go unproduced, even if demand for the show is strong.
The fireworks example illustrates the related free-rider problem. Even if the fireworks show is worth ten dollars to each person, arguably few people will pay ten dollars to the entrepreneur. Each person will seek to “free ride” by allowing others to pay for the show, and then watch for free from his or her backyard. If the free-rider problem cannot be solved, valuable goods and services—ones people otherwise would be willing to pay for—will remain unproduced.
The second aspect of public goods is what economists call “nonrivalrous consumption.” Assume the entrepreneur manages to exclude noncontributors from watching the show (perhaps one can see the show only from a private field). A price will be charged for entrance to the field, and people who are unwilling to pay this price will be excluded. If the field is large enough, however, exclusion is inefficient. Even nonpayers could watch the show without increasing the show’s cost or diminishing anyone else’s enjoyment. In other words, the relevant consumption is nonrivalrous. Nonetheless, nonexcludability is usually considered the more important of the two aspects of public goods. If the good is excludable, private entrepreneurs will try to serve as many fee-paying customers as possible, charging lower prices to some customers if need be.
One of the best examples of a public good is national defense. To the extent one person in a geographic area is defended from foreign attack or invasion, other people in that same area are likely defended also. This makes it hard to charge people for defense, which means that defense faces the classic free-rider problem. Indeed, almost all economists are convinced that the only way to provide a sufficient level of defense is to have government do it and fund defense with taxes.
Many other problems, though, that are often perceived as public-goods problems are not really, and markets handle them reasonably well. For instance, although many people think a television signal is a public good, cable television services scramble their transmissions so that nonsubscribers cannot receive broadcasts easily. In other words, the producers have figured out how to exclude nonpayers. Both throughout history and today, private roads have been financed by tolls charged to road users. Other goods often seen as public goods, such as private protection and fire services, are frequently sold through the private sector on a fee basis. Excluding nonpayers is possible. In other cases, potentially public goods are funded by advertisements, as happens with television and radio.
Partially public goods also can be tied to purchases of private goods, thereby making the entire package more like a private good. Shopping malls, for instance, provide shoppers with a variety of services that are traditionally considered public goods: lighting, protection services, benches, and restrooms are examples. Charging directly for each of these services would be impractical. Therefore, the shopping mall finances the services through receipts from the sale of private goods in the mall. The public and private goods are “tied” together. Private condominiums and retirement communities also are market institutions that tie public goods to private services. They use monthly membership dues to provide a variety of public services.
Some public goods are provided through fame incentives or through personal motives to do a good job. The World Wide Web offers many millions of home pages and informational sites, and most of their constructors have not received any payment. The writers either want recognition or seek to reach other people for their own pleasure or to influence their thinking.
The “reciprocity motive” is another possible solution, especially in small groups. I may contribute to a collective endeavor as part of a broader strategy to signal that I am a public-minded, cooperative individual. You may then contribute in return, hoping that we develop an ongoing agreement—often implicit—to both contribute over time. The agreement can be self-sustaining if I know that my withdrawal will cause the withdrawal of others as well. A large body of anecdotal and experimental evidence suggests that such arrangements, while imperfect, are often effective. Roommates, for instance, often have implicit or explicit agreements about who will take out the trash or do the dishes. These arrangements are enforced not by contract but rather by the hope of continuing cooperation.
Other problems can be solved by defining individual property rights in the appropriate economic resource. Cleaning up a polluted lake, for instance, involves a free-rider problem if no one owns the lake. If there is an owner, however, that person can charge higher prices to fishermen, boaters, recreational users, and others who benefit from the lake. Privately owned bodies of water are common in the British Isles, where, not surprisingly, lake owners maintain quality.
Well-defined property rights can solve apparent public-goods problems in other environmental areas, such as land use and species preservation. The buffalo neared extinction and the cow did not because cows could be privately owned and husbanded for profit. It is harder to imagine easily enforceable private property rights in schools of fish. For this reason we see a mix of government regulation and privately determined quotas in that area. The depletion of fish stocks nonetheless looms as a problem, as does the more general loss of biodiversity.
For environmental problems involving the air, it is difficult to imagine how property rights could be defined and enforced effectively. Market mechanisms alone probably cannot prevent depletion of the Earth’s ozone layer. In such cases economists recognize the likely necessity of a governmental regulatory solution.
Contractual arrangements can sometimes be used to overcome what otherwise would be public goods and externalities problems. If the research and development activities of one firm benefit other firms in the same industry, these firms may pool their resources and agree to a joint project (antitrust regulations permitting). Each firm will pay part of the cost, and the contributing firms will share the benefits.
Contractual arrangements sometimes fail. The costs of bargaining and striking an agreement may be very high. Some parties to the agreement may seek to hold out for a better deal, and the agreement may collapse. In other cases it is simply too costly to contact and deal with all the potential beneficiaries of an agreement. A factory, for instance, might find it impossible to negotiate directly with each affected citizen to decrease pollution.
The imperfections of market solutions to public-goods problems must be weighed against the imperfections of government solutions. Governments rely on bureaucracy, respond to poorly informed voters, and have weak incentives to serve consumers. Therefore they produce inefficiently. Furthermore, politicians may supply public “goods” in a manner to serve their own interests rather than the interests of the public; examples of wasteful government spending and pork barrel projects are legion. Government often creates a problem of “forced riders” by compelling persons to support projects they do not desire. Private means of avoiding or transforming public-goods problems, when available, are usually more efficient than governmental solutions.