- 1 Definition
- 2 Context
- 3 Two types of public goods
- 4 Provision of public goods
- It is a non-rival good: The use of the good by one party does not diminish its value for another party.
- It is a non-excludable good: Once the good is produced, it is not possible to exclude people from using the good, and thus it is not possible to force them to pay for the use of the good.
Many knowledge goods are examples of public goods.
Further information: 2 X 2 matrix of rivalry and excludability
|excludable good||non-excludable good|
|rival good||private good (most goods we think about are of this type)|| common good|
the associated market failure is called tragedy of the commons
|non-rival good||club good|| public good|
the associated market failure is called the free-rider problem
Two types of public goods
Public goods where marginal investments can benefit the production
These are public goods where small amounts of the good can be produced even for small investments.
For these kinds of public goods, even if a few people contribute to the production of the public good, some amount of that public good gets produced and this good can benefit everybody (since it is non-rival and non-excludable).
Public goods that require a fixed large investment and smaller investments are no use
These are public goods that require a huge upfront investment and where smaller quantities of expenditure do not produce any amount of the good that has value.
For these kinds of public goods, if only a few people contribute a small amount, then nobody benefits because none of the good gets produced.
Provision of public goods
Free rider problem
Further information: free rider problem
The provision of public goods generally suffers from the free rider problem: although all individuals benefit from public goods, the benefit to the individual is independent of whether the individual contributes toward the production of the public good. Thus, each individual has an incentive to be a free rider: not contribute to the provision of the public good, but enjoy the benefits anyway once others produce it. However, if all (or most) individuals think this way, then no (or very few) public goods get produced.
The qualitative nature of the free rider problem depends on the type of the public good. For public goods that require a fixed large investment, a sufficiently large number of free riders means that the public good does not get produced at all. For public goods where the marginal benefits of investment exist even at small levels, the public good may be under-produced but some of it would still get produced if there are some people who are not free riders.
Private provision of public goods
Further information: private provision of public goods
- Self-interested provision: A public good may be privately provided if the private benefit to an individual (or organization) of providing the good exceeds the private cost. Note that the private benefit is likely to be a lot less than the total social benefit (which adds up the private benefits of everybody). Further, even if the private benefit to an organization exceeds the private cost, the organization may choose not to provide the public good if it thinks that somebody else will step up to the task.
- Philanthropic provision:
State provision of public goods
Further information: state provision of public goods
Here, the government of a state (nation-state, province, etc.) uses money collected through taxes to provide specific public goods.
Note that just because a good is provided by the government of a state does not make it a public good. Conversely, not every public good needs to be provided by a government.