Public Goods

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Dictionary of Economics

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Public Goods

This is "Public Goods and Asteroid Defense" from our Principles of Economics: Microeconomics course.

While the probability of an asteroid hitting the planet is very low, its effect would be disastrous for all of us. So, who should pay for asteroid protection? A good like asteroid defense — a public good, meaning it’s nonexcludable and nonrival — has some unusual properties that challenge markets.

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The world nearly ended on September 29th, 2004. That's when the asteroid Toutatis narrowly missed the planet. An asteroid wiped out the dinosaurs and it could end humanity as well. In fact, your probability of dying from an asteroid strike is about the same as your probability of dying from an airplane crash.

 

Now, the probability that a big asteroid will hit the planet is very low, but if one does hit, it's probably going to kill everyone. So the risk is actually much higher than it appears. So can the Invisible Hand protect us from asteroids? Sadly, no. A good, like Asteroid Protection, has some unusual properties that challenge markets. If you pay for a pair of jeans, for example, then you get the exclusive use of those jeans. And if you don't pay, you are excluded from using those jeans. That's pretty obvious.

 

But Asteroid Protection is different. Asteroid Protection is non-excludable: even people who don't pay will be protected. So, think about whether you want to pay for Asteroid Protection. Your payment is probably not going to make a difference between a successful and an unsuccessful defense. So there are really only two cases to consider: either enough other people pay so that you are protected, or enough other people don't pay so that you aren't protected. Either way, whether you pay or not doesn't determine whether you get the protection or not. But paying does determine whether you get the jeans. Faced with this logic, many people may decide to buy the jeans and try to "free ride" on the kindness of others who pay for Asteroid Protection.

 

But if lots of people free ride, then no one is protected, even if asteroids threaten everyone. Asteroid Protection is an example of what economists call a public good: a good that is non-excludable and also non-rival, meaning that it doesn't cost more to protect more people. We will be looking at more non-excludable, non-rival goods, the challenges these goods give to markets, and the options for providing these goods in the next video.

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