Public goods are goods that can be consumed by everybody in a society or nobody at all. They cannot or will not be produced for individual profit, since it is difficult to get people to pay for its large beneficial externalities. It is helpful to think about a public good as one with a large positive externality. A public good is defined as an economic good which possesses two properties: non-rivalrous and non-excludable. Some examples of public goods include clean air, national defense, the judiciary, lighthouses, street lights, and the well know example of a fireworks show.
(Cowen, Tyler. Public Goods. The Concise Encyclopedia of Economics.) (Gruber, Jonathan. Public Finance and Public Policy (2nd edition). p 177-179.)
Web site: http://www.econlib.org/library/Enc/PublicGoods.html )
Non-excludable - individuals who do not pay cannot be excluded from the benefits of the good or service.
If an entrepreneur stages a fireworks show, for example, people can watch the show from their windows or backyards. Because the entrepreneur cannot charge a fee for consumption, the fireworks show may go unproduced, even if demand for the show is strong. This explains why most fireworks displays are payed for by city governments as a service to their communities.
Non-rival - One individual’s consumption of a good does not affect another persons opportunity to consume the good.
Assume the entrepreneur manages to exclude non-contributors from watching the show (perhaps one can see the show only from a private field). A price will be charged for entrance to the field, and people who are unwilling to pay this price will be excluded. If the field is large enough, however, exclusion is inefficient because even non-payers could watch the show without increasing the show's cost or diminishing anyone else's enjoyment. That is non-rivalrous competition to watch the show.
Impure public goods are goods that satisfy the two public good conditions (non-rival and non-excludable) to some extent, but not fully. These are also known as “Quasi-public.” An example of an impure public good would be cable television. The use of cable television in no way diminishes your enjoyment of it, making it non-rivalrous. But, cable companies can refuse to hook your house up to their system, making the good excludable.
(Web site: http://www.economist.com/research/Economics/alphabetic.cfm?letter=P )
Pure
Pure public goods are goods that are perfectly non-rivalrous in consumption and are non-excludable. Pure public goods are rare because there are few good that can meet both of these requirements. A classic example of a pure public good is national defense. For example, if someone built a house next to yours, their action does not diminish your national defense protection, making it non-rival. National defense is non-excludable because once an area is protected by national defense everyone in the area is protected. There is no way to be denied the use of national defense. Private goods are goods that are the opposite of public goods. Their main features are excludability (meaning that they are rival) and depletability. Private goods are almost exclusively made for profit. A good example of a private good is bread. Bread is usually made for profit and is finite because once it is eaten it is gone. Numeraire good are goods that have set prices. A good for which the price is set at $1 in order to model choice between goods based on relative prices. What matters for modeling the demand for any good is its price relative to other goods, not the absolute level of its price.
*generates both private and spillover benefits
(education, police, fire, public health)
--------------------------------|
*rival and excludable
(ex. bread or ice cream)
(from class notes Spring 2009)
(Contributed by Dr. Dadres' Public Economicsonlinepower point slides)
FREE RIDER PROBLEM
The Free Rider Problem is the main cause of private sector under provision of public goods because "when an investment has a personal cost, individuals will underinvest."
For example: KERA/90.1 the local Public Radio Station relies on listener/viewer support to operate. Three times a year the station holds pledge drives asking the viewers and listeners to make contributions or face a possible reduction in programming. According to the station, only 10 of the audience make contributions. This show a very large free-rider problem but the station is able to survive for two reasons. First the station is in part funded by the government, but it cannot survive on government funding alone. Second the station relies on contributions from foundations or wealthy individuals who are able to give much much more than the average listener or viewer. During the 2009 Winter membership drive, the station told the story of an individual who had listened to the station for over ten years yet had never contributed. This individual said the only reason she did not was because she knew someone else would. That is the essence of the Free Rider Problem, the belief that someone else will do it.
The fireworks example illustrates the "free-rider" problem. Even if the fireworks show is worth ten dollars to each person, no one will pay ten dollars to the entrepreneur. Each person will seek to "free-ride" by allowing others to pay for the show, and then watch for free from his or her backyard. If the free-rider problem cannot be solved, valuable goods and services, ones that people want and otherwise would be willing to pay for, will remain underproduced. Thus, creating a market failure because it is not profitable for business to continue to produce.
A real-world example of the free-rider problem was illustrated in the town of Cambridge, England. The town sought to provide public transportation in the form of three hundred and fifty bicycles as a public good. These bicycles would then be placed around the town and be free to anyone to use. They would be distinguished by their green color so privately owned bicycles wouldn't be confused with the public ones. However, due to the free-rider problem within 4 days all the bicycles had been stolen and repainted to disguise them as privately owned bicycles. Not only did the city lose about $20,000 but it learned a very real lesson about free-riders in modern society. (Gruber: Public Finance and Public Policy p.185 and classroom discussion) The "free-rider" problem leaves public with three main choices:
1. The public can do without the good or service.
Of course there are many goods and services that are essential to the public and the utility derived from those goods and services far outweigh whatever cost the free rider problem presents.
2. Rely on voluntarism
If enough people do not think like free-riders, the private and voluntary provision of public goods may be successful. A free rider might litter in a public park, but an altruistic individual would not do so, getting an inherent pleasure from helping the community. In fact, one might voluntarily pick up some of the existing litter. If enough people do so, the role of the state in using taxes to hire professional maintenance crews is reduced. This might imply that even someone typically inclined to free-riding would not litter, since their action would have such a cost. Public mindedness may be encouraged by non-market solutions to the economic problem, such as tradition and social norms. For example, concepts such as nationalism and patriotism have been part of most successful war efforts, complementing the roles of taxation and conscription. To some extent, public spiritedness of a more limited type is the basis for voluntary contributions that support public radio and television. Contributions to online collaborative media like Yahoo and many other projects utilizing wiki technology can also be seen to represent an example of such public spiritedness, since they provide a public good (information) freely to all readers.
3. Government Intervention
Government intervention works because unlike the private sector, it has options other than a discontinuation of goods or services. The government, for all intents and purposes, can force individuals to contribute their fair share by passing laws that threaten and punish them with fines or even jail time.
If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. Each of us are saved from our own individualistic short-sightedness, i.e. our tendency to be a free rider, while also being assured that no one else will be allowed to free ride. One frequently proposed solution to the problem is for governments, or states to impose taxation to fund the production of public goods. This does not actually solve the theoretical problem because good government is itself a public good. Thus it is difficult to ensure that government has an incentive to provide the optimum amount even if it were possible for the government to determine precisely what amount would be optimum.
Another solution is that the government provide public goods using "unfunded mandates." For example, the requirement that all drivers should have car insurance. This may be executed in the private sector, but the end result is predetermined by the state. Unfunded mandates have also been imposed by the U.S. federal government on the state and local governments, as with the Americans with Disabilities Act, for example.
HOW SHOULD PUBLIC GOODS BE PROVIDED?
Private provision of public goods
As noted earlier, the free-rider problem exists due to the under-provision of public goods by the private sector. Private provision of public goods can be successful depending on three factors: differences among individuals in their demand for the public goods, altruism among potential donors to the public good, and utility from one's own consumption to the public good. Each of these factors are discussed below:
1) Differences among individuals in their demand for the public goods - If certain individuals care more about the public good, then the free-rider problem can be solved to some extent. Consider for example, the snow-plowing illustration where a rich person and a poor person share the same driveway in their neighborhood. The rich person cares more about a clean drive-way, and as a result, is willing to spend more money to have the snow plowed. In this instance, the rich person's higher income or stronger taste of a having a clean drive-way is likely to reduce the free-rider problem. (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Page 188.)
2) Altruism among potential donors to the public good - Altruism describes the concept whereby individuals value the benefits and costs to others in making their consumption choices. If individuals are not purely selfish, utility-maximizing agents and are instead altruistic, then the free-rider problem can be solved to some extent (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Page 189.) For example, if Tom cares more about the costs of snow plowing, he is willing to contribute more in order to lower Jerry's burden. Tom may feel more concerned about the costs of snow plowing since he realizes that he is more wealthy and is willing to share a higher part of the cost burden if he cares about his neighbor Jerry.
3) Utility from one's own consumption to the public good - This can be best explained using the "warm glow model" as discussed in the textbook in Chapter 7. The warm glow model is when individuals care about both the total amount of the public good and their particular contributions as well. (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Page 190.) A great example of this is contributions to a radio station that solely relies on its listeners for financial support. If individuals enjoy the music and care about the existence of a specific radio station in their community, then the individuals are likely to contribute toward this public good, even if it creates several free-riders.
Public provision (Government) of public goods
Government intervention is sometimes necessary because the private sector may under provide public goods due to the free-rider problem. Although government intervention in this case may improve efficiency, some barriers exist that make it difficult for the government to provide public goods. These barriers include: private responses to public provision, or "crowding out"; the difficulty of measuring the costs and benefits of public goods; and the difficulty of determining the public's preferences for public goods.
1) Crowding-out - as the government provides more of a public good, the private sector will provide less. (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Page 191.) A great example of this is illustrated using a positive externality of government providing education. See the discussion of "crowd-out" under government providing pubic goods - education under this link: Positive Externalities and Education. One may argue that in most cases, any crowding out effect should not result in inefficiency because the reason for the government providing a good or service in the first place is due to under-provision by the private sector. The rational government won't provide goods/services in a public goods market that is already operating efficiently.
2) Measuring costs & benefits of public goods - In theory it is relatively simple to assume that government can estimate the costs & benefits of public goods. But in reality, it is extremely difficult to consider all types of costs and benefits regarding public goods. Consider the example of government undertaking highway improvements as suggested in the text in Chapter 7. There are explicit and implicit costs and benefits associated with an improved road system. Explicit costs include the wages of road workers, concrete costs, insurance, etc.. One implicit cost is the lost productivity of office workers who must spend more time on the road during times of construction-caused traffic jams. Some explicit benefits from the new road may include the government needing to spend less money for maintenance on the new road, and less wear and tear on government vehicles operating on the new road due to a lack of potholes. Some "semi-implicit" benefits include time saved by the aforementioned office workers who can now get to work faster on the wider road and a potential reduction in traffic accidents due to newer roads being safer. The more implicit costs are, the more difficult they become to accurately estimate or measure. While an estimate for the wages paid to road workers may be accurate to within 5%, estimates of cost savings due to a reduction in fatalities can vary widely due to the number of unknown and unpredictable variables.
3) Difficulty of determining the public's preferences for public goods - Government can face difficulties in knowing the actual preferences of the public for public goods due to three problems: preference revelation; preference knowledge; and preference aggregation. 1) Preference revelation is when individuals may not be willing to tell the government their true valuation for example, because the government might charge them more for the good if they say that they value it highly. 2) Preference knowledge is when individuals may lack the knowledge regarding public goods and as a result not know what their valuation truly is for public goods. 3) Preference aggregation is the difficult of government in attempting to consolidating the preferences of millions of citizens's preferences in order to decide on the value of a public project. (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Pages 194-195.) Unlike the market demand curve for private goods, where individual demand curves are summed horizontally, individual demand curves for public goods are summed vertically to get the market demand curve. Being that public goods have a fixed market quantity (everyone in that society must agree on consuming the same amount of that good), individual demand curves for public goods are summed vertically to give the price for a given quantity. Since society does not have to agree on a given quantity of a private good, one person can consume more than another at a given price, and the individual demand curves are summed horizontally instead.
LOCAL PUBLIC GOODS
The term local public goods refers to many of the services provided by local governments, such as K-12 public education, road maintenance, police & fire protection, and garbage disposal. Tiebout's Model reaches the conclusion that an efficient level of local public good provision can be achieved if people can choose among different communities, each offering a different level of service and tax burden, but the model assumes that families are perfectly mobile. (from the class handout "Political Economy")
NATIONAL SECURITY: "PURE" PUBLIC GOOD?
National security is accepted as a public good. It is usually referred to as a “pure” public good, meaning it is the best example of what a public good is, non-excludable and non-rival. There was in class discussion about how, in theory, national security might not be a public good. The class came to the conclusion that it would require a theoretical society in which national security was not provided by the government but established through entrepreneurship. Basically, this would mean that citizens would be required to pay for national security similarly to how they pay for cable or electricity. In economics, a great deal of what we do is in the realm of theory and we cannot exclude this theoretical society in our summation of public goods. For all practical purposes, we can assume national security to be a very good example of a “pure” public good. However, in theory we can disprove it to be “pure”.
A more cynical approach to this concept is to view taxes as payment for national security, thus making it, in a monetary respect, excludable. However the service of national security is in no way excludable. Based on the nature of our nations national security and national defense, the government cannot remove protection from one individual simply because he does not pay taxes. Likewise, the government cannot specifically remove protection from non-taxpaying aliens, legal or otherwise. Therefore, even if this is the case, and we define the Department of National Defense as a “business”, national security is still non-rival and non-excludable, the definition of a public good.
National security is, for all practical purposes, a pure public good. There will always be ways to theorize around a concept. In theory, we could disprove gravity.
WHAT IS A PUBLIC GOOD?
Public goods are goods that can be consumed by everybody in a society or nobody at all. They cannot or will not be produced for individual profit, since it is difficult to get people to pay for its large beneficial externalities. It is helpful to think about a public good as one with a large positive externality. A public good is defined as an economic good which possesses two properties: non-rivalrous and non-excludable. Some examples of public goods include clean air, national defense, the judiciary, lighthouses, street lights, and the well know example of a fireworks show.
(Cowen, Tyler. Public Goods. The Concise Encyclopedia of Economics.)
(Gruber, Jonathan. Public Finance and Public Policy (2nd edition). p 177-179.)
Web site: http://www.econlib.org/library/Enc/PublicGoods.html )
Non-excludable - individuals who do not pay cannot be excluded from the benefits of the good or service.
If an entrepreneur stages a fireworks show, for example, people can watch the show from their windows or backyards. Because the entrepreneur cannot charge a fee for consumption, the fireworks show may go unproduced, even if demand for the show is strong. This explains why most fireworks displays are payed for by city governments as a service to their communities.
Non-rival - One individual’s consumption of a good does not affect another persons opportunity to consume the good.
Assume the entrepreneur manages to exclude non-contributors from watching the show (perhaps one can see the show only from a private field). A price will be charged for entrance to the field, and people who are unwilling to pay this price will be excluded. If the field is large enough, however, exclusion is inefficient because even non-payers could watch the show without increasing the show's cost or diminishing anyone else's enjoyment. That is non-rivalrous competition to watch the show.
(Cowen, T. (2002). Public Goods and Externalities. In The Concise Encyclopedia of Economics. Retrieved July 8, 2008, from Liberty Fund, Inc. Web site: www.econlib.org/library/Enc/PublicGoodsandExternalities.html)
TYPES OF PUBLIC GOODS
Impure
Impure public goods are goods that satisfy the two public good conditions (non-rival and non-excludable) to some extent, but not fully. These are also known as “Quasi-public.” An example of an impure public good would be cable television. The use of cable television in no way diminishes your enjoyment of it, making it non-rivalrous. But, cable companies can refuse to hook your house up to their system, making the good excludable.
(Web site: http://www.economist.com/research/Economics/alphabetic.cfm?letter=P )
Pure
Pure public goods are goods that are perfectly non-rivalrous in consumption and are non-excludable. Pure public goods are rare because there are few good that can meet both of these requirements. A classic example of a pure public good is national defense. For example, if someone built a house next to yours, their action does not diminish your national defense protection, making it non-rival. National defense is non-excludable because once an area is protected by national defense everyone in the area is protected. There is no way to be denied the use of national defense.
Private goods are goods that are the opposite of public goods. Their main features are excludability (meaning that they are rival) and depletability. Private goods are almost exclusively made for profit. A good example of a private good is bread. Bread is usually made for profit and is finite because once it is eaten it is gone.
Numeraire good are goods that have set prices. A good for which the price is set at $1 in order to model choice between goods based on relative prices. What matters for modeling the demand for any good is its price relative to other goods, not the absolute level of its price.
Numerie Goods Wikipedia
Examples:
Pure public good
Quasi public
Pure private good
*National defense
*Non-rival and non-excludable
*rival and non-excludable
*non-rival and excludable
*also know as IMPURE PUBLIC
*generates both private and spillover benefits
(education, police, fire, public health)
*rival and excludable
(ex. bread or ice cream)
(Contributed by Dr. Dadres' Public Economics online power point slides)
FREE RIDER PROBLEM
The Free Rider Problem is the main cause of private sector under provision of public goods because "when an investment has a personal cost, individuals will underinvest."For example: KERA/90.1 the local Public Radio Station relies on listener/viewer support to operate. Three times a year the station holds pledge drives asking the viewers and listeners to make contributions or face a possible reduction in programming. According to the station, only 10 of the audience make contributions. This show a very large free-rider problem but the station is able to survive for two reasons. First the station is in part funded by the government, but it cannot survive on government funding alone. Second the station relies on contributions from foundations or wealthy individuals who are able to give much much more than the average listener or viewer. During the 2009 Winter membership drive, the station told the story of an individual who had listened to the station for over ten years yet had never contributed. This individual said the only reason she did not was because she knew someone else would. That is the essence of the Free Rider Problem, the belief that someone else will do it.
The fireworks example illustrates the "free-rider" problem. Even if the fireworks show is worth ten dollars to each person, no one will pay ten dollars to the entrepreneur. Each person will seek to "free-ride" by allowing others to pay for the show, and then watch for free from his or her backyard. If the free-rider problem cannot be solved, valuable goods and services, ones that people want and otherwise would be willing to pay for, will remain underproduced. Thus, creating a market failure because it is not profitable for business to continue to produce.
A real-world example of the free-rider problem was illustrated in the town of Cambridge, England. The town sought to provide public transportation in the form of three hundred and fifty bicycles as a public good. These bicycles would then be placed around the town and be free to anyone to use. They would be distinguished by their green color so privately owned bicycles wouldn't be confused with the public ones. However, due to the free-rider problem within 4 days all the bicycles had been stolen and repainted to disguise them as privately owned bicycles. Not only did the city lose about $20,000 but it learned a very real lesson about free-riders in modern society. (Gruber: Public Finance and Public Policy p.185 and classroom discussion) The "free-rider" problem leaves public with three main choices:
1. The public can do without the good or service.
Of course there are many goods and services that are essential to the public and the utility derived from those goods and services far outweigh whatever cost the free rider problem presents.
2. Rely on voluntarism
If enough people do not think like free-riders, the private and voluntary provision of public goods may be successful. A free rider might litter in a public park, but an altruistic individual would not do so, getting an inherent pleasure from helping the community. In fact, one might voluntarily pick up some of the existing litter. If enough people do so, the role of the state in using taxes to hire professional maintenance crews is reduced. This might imply that even someone typically inclined to free-riding would not litter, since their action would have such a cost. Public mindedness may be encouraged by non-market solutions to the economic problem, such as tradition and social norms. For example, concepts such as nationalism and patriotism have been part of most successful war efforts, complementing the roles of taxation and conscription. To some extent, public spiritedness of a more limited type is the basis for voluntary contributions that support public radio and television. Contributions to online collaborative media like Yahoo and many other projects utilizing wiki technology can also be seen to represent an example of such public spiritedness, since they provide a public good (information) freely to all readers.
3. Government Intervention
Government intervention works because unlike the private sector, it has options other than a discontinuation of goods or services. The government, for all intents and purposes, can force individuals to contribute their fair share by passing laws that threaten and punish them with fines or even jail time.
If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. Each of us are saved from our own individualistic short-sightedness, i.e. our tendency to be a free rider, while also being assured that no one else will be allowed to free ride. One frequently proposed solution to the problem is for governments, or states to impose taxation to fund the production of public goods. This does not actually solve the theoretical problem because good government is itself a public good. Thus it is difficult to ensure that government has an incentive to provide the optimum amount even if it were possible for the government to determine precisely what amount would be optimum.
Another solution is that the government provide public goods using "unfunded mandates." For example, the requirement that all drivers should have car insurance. This may be executed in the private sector, but the end result is predetermined by the state. Unfunded mandates have also been imposed by the U.S. federal government on the state and local governments, as with the Americans with Disabilities Act, for example.
HOW SHOULD PUBLIC GOODS BE PROVIDED?
Private provision of public goodsAs noted earlier, the free-rider problem exists due to the under-provision of public goods by the private sector. Private provision of public goods can be successful depending on three factors: differences among individuals in their demand for the public goods, altruism among potential donors to the public good, and utility from one's own consumption to the public good. Each of these factors are discussed below:
1) Differences among individuals in their demand for the public goods - If certain individuals care more about the public good, then the free-rider problem can be solved to some extent. Consider for example, the snow-plowing illustration where a rich person and a poor person share the same driveway in their neighborhood. The rich person cares more about a clean drive-way, and as a result, is willing to spend more money to have the snow plowed. In this instance, the rich person's higher income or stronger taste of a having a clean drive-way is likely to reduce the free-rider problem. (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Page 188.)
2) Altruism among potential donors to the public good - Altruism describes the concept whereby individuals value the benefits and costs to others in making their consumption choices. If individuals are not purely selfish, utility-maximizing agents and are instead altruistic, then the free-rider problem can be solved to some extent (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Page 189.) For example, if Tom cares more about the costs of snow plowing, he is willing to contribute more in order to lower Jerry's burden. Tom may feel more concerned about the costs of snow plowing since he realizes that he is more wealthy and is willing to share a higher part of the cost burden if he cares about his neighbor Jerry.
3) Utility from one's own consumption to the public good - This can be best explained using the "warm glow model" as discussed in the textbook in Chapter 7. The warm glow model is when individuals care about both the total amount of the public good and their particular contributions as well. (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Page 190.) A great example of this is contributions to a radio station that solely relies on its listeners for financial support. If individuals enjoy the music and care about the existence of a specific radio station in their community, then the individuals are likely to contribute toward this public good, even if it creates several free-riders.
Public provision (Government) of public goods
Government intervention is sometimes necessary because the private sector may under provide public goods due to the free-rider problem. Although government intervention in this case may improve efficiency, some barriers exist that make it difficult for the government to provide public goods. These barriers include: private responses to public provision, or "crowding out"; the difficulty of measuring the costs and benefits of public goods; and the difficulty of determining the public's preferences for public goods.
1) Crowding-out - as the government provides more of a public good, the private sector will provide less. (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Page 191.) A great example of this is illustrated using a positive externality of government providing education. See the discussion of "crowd-out" under government providing pubic goods - education under this link: Positive Externalities and Education. One may argue that in most cases, any crowding out effect should not result in inefficiency because the reason for the government providing a good or service in the first place is due to under-provision by the private sector. The rational government won't provide goods/services in a public goods market that is already operating efficiently.
2) Measuring costs & benefits of public goods - In theory it is relatively simple to assume that government can estimate the costs & benefits of public goods. But in reality, it is extremely difficult to consider all types of costs and benefits regarding public goods. Consider the example of government undertaking highway improvements as suggested in the text in Chapter 7. There are explicit and implicit costs and benefits associated with an improved road system. Explicit costs include the wages of road workers, concrete costs, insurance, etc.. One implicit cost is the lost productivity of office workers who must spend more time on the road during times of construction-caused traffic jams. Some explicit benefits from the new road may include the government needing to spend less money for maintenance on the new road, and less wear and tear on government vehicles operating on the new road due to a lack of potholes. Some "semi-implicit" benefits include time saved by the aforementioned office workers who can now get to work faster on the wider road and a potential reduction in traffic accidents due to newer roads being safer. The more implicit costs are, the more difficult they become to accurately estimate or measure. While an estimate for the wages paid to road workers may be accurate to within 5%, estimates of cost savings due to a reduction in fatalities can vary widely due to the number of unknown and unpredictable variables.
3) Difficulty of determining the public's preferences for public goods - Government can face difficulties in knowing the actual preferences of the public for public goods due to three problems: preference revelation; preference knowledge; and preference aggregation. 1) Preference revelation is when individuals may not be willing to tell the government their true valuation for example, because the government might charge them more for the good if they say that they value it highly. 2) Preference knowledge is when individuals may lack the knowledge regarding public goods and as a result not know what their valuation truly is for public goods. 3) Preference aggregation is the difficult of government in attempting to consolidating the preferences of millions of citizens's preferences in order to decide on the value of a public project. (Public Finance & Public Policy, Second Edition. Jonathan Gruber. Chapter 7. Pages 194-195.) Unlike the market demand curve for private goods, where individual demand curves are summed horizontally, individual demand curves for public goods are summed vertically to get the market demand curve. Being that public goods have a fixed market quantity (everyone in that society must agree on consuming the same amount of that good), individual demand curves for public goods are summed vertically to give the price for a given quantity. Since society does not have to agree on a given quantity of a private good, one person can consume more than another at a given price, and the individual demand curves are summed horizontally instead.
LOCAL PUBLIC GOODS
The term local public goods refers to many of the services provided by local governments, such as K-12 public education, road maintenance, police & fire protection, and garbage disposal. Tiebout's Model reaches the conclusion that an efficient level of local public good provision can be achieved if people can choose among different communities, each offering a different level of service and tax burden, but the model assumes that families are perfectly mobile. (from the class handout "Political Economy")
NATIONAL SECURITY: "PURE" PUBLIC GOOD?
National security is accepted as a public good. It is usually referred to as a “pure” public good, meaning it is the best example of what a public good is, non-excludable and non-rival. There was in class discussion about how, in theory, national security might not be a public good. The class came to the conclusion that it would require a theoretical society in which national security was not provided by the government but established through entrepreneurship. Basically, this would mean that citizens would be required to pay for national security similarly to how they pay for cable or electricity. In economics, a great deal of what we do is in the realm of theory and we cannot exclude this theoretical society in our summation of public goods. For all practical purposes, we can assume national security to be a very good example of a “pure” public good. However, in theory we can disprove it to be “pure”.
A more cynical approach to this concept is to view taxes as payment for national security, thus making it, in a monetary respect, excludable. However the service of national security is in no way excludable. Based on the nature of our nations national security and national defense, the government cannot remove protection from one individual simply because he does not pay taxes. Likewise, the government cannot specifically remove protection from non-taxpaying aliens, legal or otherwise. Therefore, even if this is the case, and we define the Department of National Defense as a “business”, national security is still non-rival and non-excludable, the definition of a public good.
National security is, for all practical purposes, a pure public good. There will always be ways to theorize around a concept. In theory, we could disprove gravity.
LINKS
What is a public good?
Wikipedia: Public Goods
Encycolopedia of Economics: Public Goods
Auburn University: Public Goods