A Deeper Look at Public Goods

In the first video in this chapter, we introduced public goods and the terms: nonexcludable and nonrival. In this video, we'll explain what these terms mean and why public goods can challenge markets.

Nonexcludable means that people who don't pay cannot be easily prevented from using the good. Jeans are excludable, and asteroid deflection is nonexcludable, because it's easy to prevent people who don't pay for jeans from using the jeans. But it's hard to prevent people who don't pay for asteroid deflection from benefiting from asteroid deflection. If the asteroid is prevented from hitting the earth, everyone's going to benefit whether they paid for it or not.

Nonrival means that one person's use of the good doesn't reduce the ability of another person to use the good. Jeans are rival and asteroid deflection is nonrival, because if one person is using a pair of jeans, it's pretty difficult for another person to use the same jeans at the same time. But asteroid deflection is nonrival, because if one person is using asteroid deflection that doesn't reduce the ability of another person to benefit from the same asteroid deflection. For asteroid deflection, the more the merrier. In fact, these two categories, nonexcludable and nonrival, divide goods into four possible types.

Let's look at the most familiar category first -- goods that are excludable and rival. These are the private goods: jeans, hamburgers, contact lenses, and so forth. Markets are great at providing these goods because excludability means that only people who pay get the good. So consumers have an incentive to pay, and producers therefore have an incentive to produce these goods. Rivalry means that excluding non-payers doesn't waste resources, because it costs more to produce more of these goods, and we only want to supply more when people are willing to pay the additional cost. We covered this earlier in the equilibrium chapter. Click to go back and review.

Now let's turn to public goods -- nonexcludable and nonrival. We've already given asteroid deflection as one example. National defense and mosquito control are other examples. Let's think about national defense. Is it excludable? Suppose we try to use markets to provide national defense. If some people bought a nuclear missile to deter another country, that deterrence benefits everyone, even those who don't pay. We sometimes refer to the nuclear umbrella to reflect the idea that it's hard to exclude people from the benefits of national defense. Since it's hard to exclude non-payers, there's an incentive not to pay, and to try to free ride. But if everyone free rides and doesn't pay, then national defense doesn't get produced. Now is national defense rival or nonrival? Does one person's benefiting from national defense reduce my benefit? No. So national defense is nonrival.

Public goods -- those goods which are both nonexcludable and nonrival, therefore provide a challenge to markets. We'll be saying more about the two other cases: common resources -- nonexcludable, but rival, like tuna in the ocean; and club goods -- excludable but not rival, like Wi-Fi, in future videos. For now, we're going to say a little bit more about public goods and how to produce them. Public goods challenge markets because nonexcludability means that it's difficult to charge non-payers, the free rider problem. In addition, nonrivalry means that it's inefficient to exclude anyone. Why exclude when there's no cost to serving an additional consumer? So how can we produce public goods? These goods provide an argument for taxation and government provision. After all, if these goods are valuable, but markets have trouble producing them, we'd like some other way to produce these goods.

But there's a problem. How do we decide which public goods, and how much of them, and in what ways to produce these goods? For private goods, we know that under the right conditions there's an invisible hand process which leads to the maximization of social surplus. So can voting and other democratic procedures work as well in providing public goods, as markets do in providing private goods? Probably not. The problem here is there is no invisible hand theorem for public goods.

Here's a way of thinking about the difficulty of providing public goods. We know that under the market system there's a problem because there are free riders. People who don't pay even though they benefit. But under the government provided system there is a symmetric problem: forced riders. People who are forced to pay through taxation, when they don't benefit. Or people who are forced to pay by more than they benefit. These two twin problems are equally important, and it's difficult to solve either of them. To maximize the value of public goods, we want to minimize free riders and minimize forced riders. But there's no invisible hand process that makes this happen automatically or smoothly.

We're going to have to muddle through with a sometimes kind of messy political process. In addition, in the market, entrepreneurs are always trying to discover new private goods, or new ways of producing private goods at lower cost. In the political process, it's just much less clear who the entrepreneurs are, and whether they have the right incentives to discover new public goods, or new ways of producing public goods at lower cost. Nevertheless, public goods are still important. So sometimes muddling through is just going to be the best that we can do.

One final point about terminology. A public good, as we've said, is a good which is nonexcludable and nonrival. A public good is not defined as a good, but is produced by the government or the public sector. After all, if the government started to produce jeans, that would not make jeans a public good. Mail delivery is provided by the government, but it's not a public good. Asteroid deflection, it is a public good, but actually, very little of it is provided by government. So just keep the definition in mind. A public good is a good which is nonexcludable and nonrival.

In the next video, we're going to tackle club goods. Thanks.