Beruflich Dokumente
Kultur Dokumente
Public Sector
Economics
edited by
Donijo Robbins
Grand Valley State University
Grand Rapids, Michigan
5
Public Goods
PAUL C. TROGEN
Department of Economics, Finance and Urban
Studies, East Tennessee State University,
Johnson City, TN
5.1 INTRODUCTION
Public goods are both unique and fascinating because it is
virtually impossible to allocate a pure public good through
market mechanisms. For all other goods, markets have
emerged as the dominant means of allocation and distribution, and the current trend is toward even greater dependence
on markets to allocate goods. At the beginning of the third
millennium, markets have been almost universally embraced
as the most efficient way to allocate resources, and free markets have emerged as the prevalent world ideology. Even the
Chinese Communist Party, which once viewed itself as the
guardian of the purest from of Marxism, has replaced state
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The casual definition is that public goods are those goods and
services that are provided through the public sector (Holcombe,
1996, p. 98; Heikkila, 2000, p. 103; Ulbrich, 2003, p. 67). Public
provision does not necessarily mean public production (Musgrave, 1986, p. 41). For example, private companies usually
produce fighter planes, but the planes are purchased with
public tax dollars.
This casual definition, while usually correct, is not
entirely accurate, as governments may also supply some private goods to individuals (Buchanan, 1970, p. 30; Musgrave,
1999a, p. 68; Stiglitz, 2000, p. 136). An example of a publicly
provided private good is public housing. Despite the term
public in public housing, both the tenants and management
of those units are likely to consider each apartment as a private
living space set aside for personal use rather than a public
space open for use by the general public. It is also interesting
that when governments provide private goods, they often act
like private firms in that they charge for services (Buchanan,
1970, p. 30). Public housing charges each tenant rent, public
universities charge tuition to each student, and the postal
service charges postage for each letter. Therefore, while the
rule of thumb that governments must supply public goods is
almost always correct, the converse, that all goods provided
by governments are public goods, has more exceptions.
Another exception to the casual definition may arise in
those rare instances where a private entity may provide a
public good. This rarely occurs with a pure public good but
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Rivalry
Public Goods
175
many people (Bruce, 2001, p. 56; Hyman, 2002, p. 135; Mikesell, 1995, p. 3; Stiglitz, 2000, p. 128). Another way to envision
the concept of nonrivalry is the term joint use (Mikesell, 1995,
p. 4). For example, many people can simultaneously enjoy fireworks. Our ability to enjoy a fireworks display is in no way
diminished when an additional person observes the fireworks.
Once you produce a nonrival good for one person, it is available for everyone. Public goods are nonrival in consumption.
The term nonrival is not universal. This same general
concept has also been labeled as collective consumption (Holcombe, 1996, p. 97), and joint consumption (Gwartney and
Stroup, 1997, p. 94). Although the terms collective consumption and joint consumption are less common, they have the
advantage of evoking images of goods being enjoyed by a
group or a community. Despite the imagery evoked by these
less frequently used terms, for communication purposes it is
preferable to use the most commonly used term, nonrival.
5.2.3.2
Excludablity
A good is excludable when it is feasible to exclude individuals from enjoying a good unless they pay for it (Stiglitz, 2000,
p. 128; Weimer and Vining, 1999, p. 75). A can of soft drink
is an example of an excludable good, as a vending machine
can easily prevent people who do not pay from obtaining the
soft drink. A good is nonexcludable when it is not feasible
to exclude those who do not pay (Bruce, 2001, p. 56). A fireworks display is nonexcludable, as there is no feasible way to
exclude those who do not pay from seeing the fireworks. Public
goods are nonexcludable.
5.2.4
Public goods are those that are both nonrival and nonexcludable. The concepts of rivalry and excludability allow us not
only to define public goods but also to differentiate them from
other categories of goods. For simplicity, some economists
treat rivalry and excludability as dichotomous variables
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Yes
Excludable
Toll goods
Examples: toll road, cable TV,
movie theater, college course
Private goods
Examples: chewing gum,
can of soda, pair of stockings
Nonexcludable
Public goods
Examples: National defense,
lighthouse, fireworks display,
radio waves
Common goods
Examples: Fish in the sea,
common pastures, clean air,
clean water
Public Goods
177
Private goods (northeast quadrant) are the polar opposite of public goods, in that they are both rival in consumption
and excludable (Mikesell, 1995, p. 4; Weimer and Vining, 1999,
p. 81). Examples include food and clothing (Mikesell, 1995,
p. 4). A can of soft drink is a good example of a private good.
The can is rival in consumption, as when one individual
drinks from the can, that act usually precludes another person
from enjoying the same can of soft drink. A can of soda is also
excludable, as a soft drink machine can easily exclude people
who do not pay from obtaining a can. Most goods purchased in
markets are private goods (Bruce, 2001, p. 57). These goods are
ideally suited to markets, as excludability assures that producers of these goods will get paid for their efforts, and rivalry
in consumption reduces the likelihood that consumers will try
to enjoy someone elses goods rather than buying their own.
Common goods (southeast quadrant) are rival in consumption but are not excludable. This term is not universal;
such goods are sometimes called common pool resources
(Mikesell, 1995, p. 4) or common resources (Mankiw, 1998,
p. 227). Examples include aquifers and petroleum reserves
(Mikesell, 1995, p. 4), the environment (Mankiw, 1998, p. 227),
and fish in the ocean (Mikesell, 1995, p. 4; Mankiw, 1998,
p. 227). These goods are large and accessible from many locations, which makes them nonexcludable. Common goods are
different than public goods, however, because they are rival
in consumption. For example, the fish in the ocean are rival in
consumption, as a fish caught by one person is not available
for use by any other person. The use of a common good by
one person may preclude another person from using it.
Toll goods (northwest quadrant) are those goods that
are nonrival in consumption but still excludable (Mikesell,
1995, p. 4; Weimer and Vining, 1999, p. 80). An alternative
term is natural monopolies (Mankiw, 1998, p. 227). Examples
of toll goods include turnpikes (Mikesell, 1995, p. 4; Mankiw,
1998, p. 227); toll bridges (Mikesell, 1995, p. 4); motion pictures (Mikesell, 1995, p. 4); and cable television (Mankiw,
1998, p. 227). These goods are nonrival. For example, the
viewing of a cable television program by one person in no way
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Public Goods
Degree of Excludablity
100%
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Toll Good
Pure
Private
50%
Common Good
50%
Degree of Rivalry
100%
Degrees of Rivalry
In the real world, few goods are either totally rival or totally
nonrival. Most goods stand somewhere between those two
extremes. At the nonrival end of the continuum is national
defense. National defense is totally nonrival for all citizens,
as each citizen receives the entire benefit of national defense,
regardless of the number of citizens. As a consequence, there
is no additional cost in delivering the exact same level of
protection to an additional citizen. On the opposite end of the
continuum are goods that are totally rival. A hat is totally
rival as it can only be worn by one person at a time. As a
consequence, there is an additional cost to providing a hat to
each additional person.
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a benefit in the form of a reduced risk of exposure to a contagious disease. If all people were vaccinated, it might be
possible to eradicate the disease altogether. For example, an
international smallpox vaccination program virtually wiped
out that disease (Stiglitz, 2000, p. 131). In this instance, not
only did each recipient receive a private good of immunity
from the disease, but all future generations also received a
public good of the eradication of the disease.
While a few purely rival or purely nonrival goods may
exist, most goods exert at least some externalities that make
them neither purely rival nor purely nonrival. In the real world,
most goods gravitate toward the middle of the continuum.
5.3.1.2
Degrees of Excludability
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Public Roads
Percent Excludable
100
50
Rural Controlled
Access Highway
City Street 3 a.m.
City Street 5 a.m.
0
0
50
Percent Rival
100
Public Goods
183
Goods
Percent Excludable
100
Pure Private
Good:Can of
Soda
50
Pure Public
Good: National
Defense
0
0
50
Percent Rival
100
The term pure public good is used far less frequently than
the term public good. Pure public goods are those goods that
are completely nonrival and completely nonexcludable
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National public goods are pure public goods that are nonexcludable, but only within a nations borders. National public
goods include national defense, a legal system, and sometimes
even efficient government (Stiglitz, 2000, p. 149). These goods
are nonrival and nonexcludable for those within a country.
When I am in the United States, I benefit from U.S. national
defense, but if I travel to Russia, I temporarily enjoy the
benefits of Russian defense spending. These benefits are nonexcludable, but I can only enjoy one countys defense spending
at a time. There may even be some positive spillovers that
may extend the benefits of national public goods beyond
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Local public goods are pure public goods as they are nonrival
and no one is excluded for not paying. But their benefit is
limited to a small geographical area. For example, an openair concert is a pure public good, but its music can extend at
most a couple of hundred yards from the stage. Many of the
best classical examples of public goods, such as lighthouses
and fireworks, are nonexcludable because we do not have to
pay to enjoy them, but to enjoy these goods we will have to
travel to them. Transportation costs often make it economically irrational for us to enjoy the benefits of local public goods
in distant places. Local public goods are available to all people
without price, but people have to come to the good to enjoy it.
International, national, and local public goods are pure
public goods, as it is infeasible to exclude nonpayers. Geography may create practical limitations on our ability to take
advantage of these goods. The limited geographical benefit
area of national public goods does not prevent economists
from using national defense as the most commonly cited
example of a pure public good. Other classical examples of
goods that are completely nonrival and completely nonexcludable, such as lighthouses and fireworks displays, are local
public goods. So local public goods are theoretically pure public goods because they are totally nonrival and nonexcludable,
despite the practical travel costs some people may incur in
coming to use them.
Public Goods
5.3.2.2
187
Impure goods occupy the vast area between pure public goods
and pure private goods. There are both impure public and
impure private goods. The concept of impure public goods is
more common, so it is a logical place to start.
Economists have proposed several alternative categories
for less-than-pure public goods, not all of which are compatible
with each other. Alternatives include impure public goods
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Congestion violates the assumption that public goods are nonrival in consumption. A congestible public good is a public
good that is nonrival under moderate use but becomes congested under heavy use (Ulbrich, 2003, p. 77). With congestion, each additional user imposes costs on the other users
(Weimer and Vining, 1999, p. 80; Hyman 2002, p. 139; Bruce,
2001, p. 70). Congested public goods are sometimes also called
ambient public goods (Weimer and Vining, 1999, p. 84). A
highway is a good example of a congestible public good. During nonpeak hours it resembles a public good, but it may
become congested during rush hour.
5.3.2.3.3
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clearly a private good, some communities provide public housing with subsidized rents to those who cannot otherwise afford
housing. Public involvement in a private good such as housing
is done under the premise that the public also derives some
value or utility from knowing the least fortunate of its citizens
have the basic necessities. An alternative way to meet the
same need is for government to subsidize the rent to privatelyowned housing to those who otherwise could not afford roofs
over their heads.
As we see, the impure goods are impure because they
have characteristics of more than one type of good. Some of
these impure goods may resemble more than one type of
impure good. We differentiate pure public goods from these
impure categories so we can use the pure examples when
thinking about the challenges of providing public goods in a
market economy.
5.4 THE CHALLENGE OF PROVIDING
PUBLIC GOODS
Although public goods are needed in market economies, the
provision of those public goods presents difficult challenges
to those markets. Markets are very efficient at producing
private goods because such goods are both rival in consumption and excludable. Markets face enormous difficulties allocating resources to the production of public goods because
public goods lack both these qualities. One way to understand
the difficulty markets face in producing pure public goods is
to identify the mechanisms that allow the market to effectively
produce pure private goods and to identify how differences
between pure private and pure public goods short-circuit
those market mechanisms.
5.4.1
Public Goods
193
Each individual has little choice but to reveal his or her own
preferences when purchasing rival goods. Bread is a good
example of a good that is rival in consumption. A slice of bread
eaten by one person is not available for enjoyment by any
other person. Nor can one person vicariously enjoy the taste
of bread eaten by another. Therefore, each individual faces
incentives to make his or her preferences transparent by
buying the kind of bread he or she really likes. The baker,
looking out for his or her own self-interest, in turn has an
incentive to bake the kind of bread the customers want. Thus
the baker shifts resources from the production of breads that
do not sell well to the production of breads that customers
want.
5.4.1.2
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5.4.1.4
195
Markets place goods in the hands of the people who most want
them. If one person highly values a good and is willing to pay
the market price, that individual is free to purchase the good.
On the other hand, if another person places a lower value on
the same good than the market price, that individual is not
compelled to buy it. Thus markets place goods in the hands
of those who value them most. Individuals, in an effort to
maximize utility, make those purchases that most increase
their utility, at the lowest cost.
5.4.1.4.2
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Since pure public goods and pure private goods are polar
opposites, the reasons that markets are so effective at providing private goods are the same reasons they are ineffective
at providing public goods.
5.4.2.1
Public Goods
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5.4.2.3.1
Voluntary Provision
Public Goods
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Mixing Goods
User Fees
A more transparent way to collect fees is to, whenever possible, use a user fee. If the potential payment is greater than
the transaction cost, it is reasonable to make the effort to
exclude (Ulbrich, 2003, p. 68). Some nearly pure public goods,
such as fire protection, are provided with fees.
5.4.2.3.3.1 User Fees and Pure Public Goods. Fire protection is a nearly pure public good, as it is nearly completely
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