What are public goods?

Posted 2023-05-12 19:29:33

Key points

A public good has two key characteristics: it is nonexcludable and nonrivalrous. These characteristics make it difficult for market producers to sell the good to individual consumers.
Nonexcludable means that it is costly or impossible for one user to exclude others from using a good.
Nonrivalrous means that when one person uses a good, it does not prevent others from using it.

Public goods

Even though new technology typically creates positive externalities through which one-third to one-half of the social benefit of new inventions spills over to others, the inventor still receives some private return. But what about a situation where the positive externalities are so extensive that private firms could not expect to receive any of the social benefit? This kind of good is called a public good.

In this article, we'll define the characteristics of a public good and discuss why these characteristics make it difficult for private firms to supply public goods.

The definition of a public good

Economists have a strict definition of a public good, and it does not necessarily include all goods financed through taxes. To understand the defining characteristics of a public good, first consider an ordinary private good, like a piece of pizza. A piece of pizza can be bought and sold fairly easily because it is a separate and identifiable item. However, public goods are not separate and identifiable in this way.

Instead, public goods have two defining characteristics: they are nonexcludable and nonrivalrous. The first characteristic, that a public good is nonexcludable, means that it is costly or impossible to exclude someone from using the good. If Larry buys a private good like a piece of pizza, then he can exclude others, like Lorna, from eating that pizza. However, if national defense is being provided, then it includes everyone. Even if you strongly disagree with America’s defense policies or with the level of defense spending, the national defense still protects you. You cannot choose to be unprotected, and national defense cannot protect everyone else and exclude you.

The second main characteristic of a public good—that it is nonrivalrous—means that when one person uses the public good, another can also use it. With a private good like pizza, if Max is eating the pizza, then Michelle cannot also eat it it—the two people are rivals in consumption. With a public good like national defense, Max’s consumption of national defense does not reduce the amount left for Michelle, so they are nonrivalrous in this area.

A number of government services are examples of public goods. For instance, it would not be easy to provide fire and police service so that some people in a neighborhood would be protected from the burning and burglary of their property, while others would not be protected at all. Protecting some necessarily means protecting others, too.

Positive externalities and public goods are closely related concepts. Public goods have positive externalities, like police protection or public health funding. Not all goods and services with positive externalities, however, are public goods. Investments in education have huge positive spillovers but can be provided by a private company. Private companies can invest in new inventions such as the Apple iPad and reap profits that may not capture all of the social benefits.

Can markets produce public goods?

Government spending and taxes are one way to provide public goods, but they're not the only way. In some cases, markets can produce public goods.

Think about radio, for example. It is nonexcludable since once the radio signal is broadcast, it would be very difficult to stop someone from receiving it. It is also nonrivalrous since one person listening to the signal does not prevent others from listening as well. Because of these features, it is practically impossible to charge listeners directly for listening to conventional radio broadcasts.

Radio has found a way to collect revenue by selling advertising, which is an indirect way of charging listeners by taking up some of their time. Ultimately, consumers who purchase the goods advertised are also paying for the radio service since the cost of advertising is built into the product cost. In a more recent development, satellite radio companies, such as SirusXM, charge a regular subscription fee for streaming music without commercials. In this case, however, the product is excludable—only those who pay for the subscription will receive the broadcast—and thus is not a public good.

Some public goods also have a mixture of public provision at no charge along with fees for some purposes. A public city park that is free to use but charges a government fee for parking your car, for reserving certain picnic grounds, and for food sold at a refreshment stand would be an example of this.

Summary

A public good has two key characteristics: it is nonexcludable and nonrivalrous. These characteristics make it difficult for market producers to sell the good to individual consumers.
Nonexcludable means that it is costly or impossible for one user to exclude others from using a good.
Nonrivalrous means that when one person uses a good, it does not prevent others from using it.