A Deeper Look at Public Goods

Description: What do we mean by “nonexcludable” and “nonrival” when talking about public goods? Public goods challenge markets because it’s difficult to charge non-payers and it’s inefficient to exclude anyone — so, how do we produce them? Public goods provide an argument for taxation and government provision. But how do we know which public goods should be provided? In this video we cover the free-rider problem and the forced-rider problem in regards to public goods. We also discuss examples of the four different categories of goods, which will be covered in future videos: private goods, commons resources, club goods, and public goods.

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- [Prof. Alex Tabarrok] 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 gonna 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 gonna 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, not defined as a good

that 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.

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