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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- [Alex] 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,
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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to test yourself,

click "Practice Questions."

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