PrintWhich economic goods or services should be supplied by governments? This is an area of great discussion, with lots of political differences. Most economists would say that governments should supply things that are not supplied in the socially optimal (marginal cost = marginal benefit) amount. These things are known as Public Goods.
What defines a public good? There are two terms we have to examine to describe whether something is a public good or not.
Rivalry
A good is “Rival” if one person’s consumption of that good excludes somebody else from consuming that good. If I am reading a magazine, it is difficult for someone else to read the same magazine at the same time. If I eat an orange, it is impossible for somebody else to eat the same orange. Non-rival: my consumption does not affect yours. If I am listening to a radio station, you are not excluded from listening to that radio station. If I am driving down a road, you are also able to drive down that road.
Excludability
A person can be excluded from consuming some goods if they refuse to pay for that good. In order to eat the orange, I have to first give a shopkeeper money in exchange for it. If I do not give him money, he is legally able to stop me from eating it. However, nobody can stop me from breathing the air in the atmosphere, and nobody can stop me from watching a sunset.
So we have two characteristics: the rivality of a good, and the excludability of the good. We can place these on the two axes of a two-by-two table:
If a good is both non-rival, and non-excludable it is a Public Good.
If it is both rival and excludable, it is a Private Good.
If a good is rival, but non-excludable it is a Common Pool.
If a good is non-rival but excludable it is a Club Good.
- There are many things that are private goods.
- There are very few things that are pure public goods. This is because of crowding - something that is free for all can become overcrowded, and if this happens, then consumption becomes rival.
“The Tragedy of the Commons”
A common pool presents a problem, in that nobody who uses a common pool has an incentive to consume less today and save some for tomorrow. If you chose to defer consumption of a good to tomorrow, then somebody else will come in and consume it today. Therefore, it is in your best interest to consume extra today. When many people behave like this, the common pool will be exhausted very quickly. The common answer to this is to grant property rights to the pool. Then, when somebody owns the pool, they have an incentive to preserve some of it for tomorrow. This is why cows (or camels) are not in danger of becoming extinct – all cows and camels are owned by somebody. African elephants were in danger of going extinct because nobody owned elephants, and people would kill hem for ivory. In southern Africa, elephants have been converted to private property, and the population is growing. Note that the Indian elephant has never been at risk of extinction because, in India, elephants are working animals that are owned by people.
Here is a short summary point: any good that can be provided by a market is a private good. If it is impossible for a good to be provided by a market, then it is a public good. But there are very few things that cannot be provided by a market. The atmosphere we breathe is one, and the most common other ones are criminal justice systems and national defense forces, although some people believe that these last two can be provided by using market mechanisms.