Economics Forum 1: Public Goods
Todays blog post from me will be the first in what I hope to make a series of open dialogues with the readers of Show-Me Daily on economic topics. Today’s topic is public goods.
There are many misconceptions about what constitutes a public good. It seems like state parks, public schools, roads, and many other things currently provided by the government are public goods. In a sense, they are. They are what economists call “goods”: people would pay to use them if they weren’t free(as opposed to “bads,” which people pay to get rid of; garbage is an example). And they are publicly owned — that is, owned by the state — which ostensibly means that every person has an equal claim to them, and that no one can forbid anyone else from using them.
Economists, however, are very specific when they speak of public goods. A public good is any good which is non-rival and non-excludable. Don’t get scared by the terms. A rival good is one where my using or consuming it prevents you from using or consuming it, like a bike, an apple, or a particular seat at a concert. So a non-rival good is something that, if consumed or used by one doesn’t diminish anyone else’s ability to use or consume it, like listening to a concert (on the radio, or a recording, or from your own house if you live next to the Verizon Wireless Amphitheater (formerly Riverport).
Another example of something non-rival is … this blog. When you read it, this doesn’t diminish anyone else’s ability to read it (the bandwidth of our server is rival, of course, but thankfully Google creates backup locations where websites can be found when their bandwidth is exceeded). The air is often cited as an example of something non-rival, but some economists dispute this. National Defense is also a commonly cited non-rival good. No matter who pays to defend our borders, everyone inside gets protected.
Excludability is a bit tougher to pin down. Simply put, a good is excludable if it is possible to prevent someone who didn’t pay for it from consuming it. So, it seems that the air is non-excludable, and big screen TVs are excludable. The tricky part comes in realizing that excludability is actually a range of values, not just yes or no. Anything can be excludable, depending on how much you are willing to pay to stop particular people, or people in general, from consuming it. And anything can be non-excludable: you could consume anything you want, as long as no one were to stop you.
There is a modicum of security in place at most businesses designed to prevent people from treating their goods as non-excludable, but these systems are not perfect. Excludability for any item exists on a continuum from cheap to exclude (bus riders who don’t want to pay) to expensive to exclude (people who live next to Riverport; the amphitheater’s owners could build a soundproof dome around the place, but why would they?).
I’ve gone on long enough. A public good is that which is non-rival and non-excludable. Think about it and comment away! What surprising results does this lead to? Is fire protection service a public good? Which public goods do you think the government should or should not provide? I am eager to hear what everyone thinks. Expect my next Econ Forum post soon.
A lighthouse is the example I most often hear.
I’m often confused on whether radio waves are public or not. They are non-rival, sure, but is it excluding? Anyone with a radio can pick AM/FM signals up, but what if you do not have a radio. Does ownership of a necessary, secondary good count as excludability?
A similar example would be the interstate system, but even if you do not have a car, you can still walk on it. There is no other way to pick up radio signals, except of course you have a coconut, palm leaves, and the rotting remains of the S.S. Minnow.
Your thoughts Josh?
Comment by Jake Voss — February 5, 2009 @ 12:44 p.m.
I recommend the last chapter of The Firm, the Market, and the Law
http://www.amazon.com/Firm-Market-Law-R-Coase/dp/0226111016/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1233862624&sr=8-1
about lighthouses provided privately.
Comment by Sarah Brodsky — February 5, 2009 @ 1:38 p.m.
Here’s a PDF of Coase’s lighthouse argument. Some economists have disputed it since then, though…
Comment by Eric D. Dixon — February 5, 2009 @ 3:35 p.m.
Thanks for the lighthouse links, Eric. I don’t get a pdf when I click on the first one, though–it just goes to the China Center for Economic Research.
Comment by Sarah Brodsky — February 5, 2009 @ 3:59 p.m.
to Jake: In my understanding the point of excludability, as it pertains to non-rival goods, is the concern about free-riders. I surmise that having to purchase a second, essential good in order to consume something non-rival does not necessarily constitute excludability, but it could. Anybody can make a radio and sell it, thus giving consumers the benefit of the radio service providers, but few can make an Xbox which gives access to Xbox Live Arcade. I suppose the question is whether the secondary good is proprietary or otherwise expensive to obtain/produce. I will give this more thought.
Comment by Josh Smith — February 6, 2009 @ 9:32 a.m.
my labor is not cost effectively excludable. ie taxes.
Comment by vroman — February 6, 2009 @ 3:14 p.m.
I’ve been thinking about piracy a good deal lately. Are illegal torrents a public good? Is legality necessary?
Let’s say I want a copy of “The Dark Knight” on DVD. I go online, I find an illegal torrent, and download it. Now, ignoring my former post on whether or not a secondary purchase constitutes excludability. Anyone is free to download these torrents, and my downloading it does not prevent anyone else from also downloading it. Will illegal downloads become the new lighthouse example, or does the fact that a majority of them illegal keep them from being a true public good?
Comment by Jake Voss — February 10, 2009 @ 11:39 a.m.
downloading is a great example of cost-INeffective excludability. yes the copyright owner can exclude non-payers from viewing the movie, but only by mobilizing large organizations (ie FCC) and expending huge effort to succesfully prosecute violators, at a net-loss to the economy as a whole. the intellectual property owners (viewing their past profits) have a lot to lose, however with the logarithmic internet usage increases, they have already lost. free markets prevent the long term existence of firms whos strategy hinges on playing a negative-sum game. assuming we do not descend into a fully planned economy, the IP niche will ultimately fade away.
Comment by vroman — February 18, 2009 @ 1:01 a.m.