13.3 Public Goods

Public goods and common resources are unique economic concepts that challenge traditional market dynamics. These goods, like national defense or clean air, are non-excludable and non-rivalrous, meaning everyone can benefit without reducing availability for others.

The free rider problem arises when people can enjoy public goods without paying, leading to underprovision by private markets. Governments often step in to ensure adequate supply through direct provision, subsidies, regulations, or market-based solutions like tradable permits.

Public Goods and Common Resources

Characteristics of Public Goods

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• Non-excludable
  • Impossible or very costly to prevent individuals from consuming good (national defense, public parks, clean air)
  • Even if they don't pay for it, people can still benefit
• Non-rivalrous
  • One person's consumption doesn't reduce availability for others
  • Marginal cost of providing good to additional person is zero
  • More users don't diminish quantity or quality (uncongested public park, streetlights)
• Non-rejectable
  • Individuals can't choose not to consume good
  • Must accept benefits (or consequences) of public goods like national defense or pollution control

Free Rider Problem

• Free rider problem
  • Individuals benefit from good without paying due to non-excludability
  • People have incentive to "free ride" on others' contributions (public radio, fireworks display)
• Implications for public good provision
  • Private markets tend to underprovide or not provide public goods at all
    • Firms lack incentive to supply goods people can consume for free (lighthouse, scientific research)
  • Government intervention often necessary for optimal public good provision
    • Tax revenue can fund public goods (national defense, public education)
    • Regulation or mandates can compel provision (automotive safety standards, vaccinations)

Government Strategies for Public Goods and Common Resources

• Direct provision
  • Government supplies public good itself (national defense, public schools, roads and bridges)
  • Ensures adequate provision of essential goods and services
• Subsidies and grants
  • Government funds private firms or organizations to encourage public good provision
  • Incentivizes desired activities (renewable energy subsidies, research grants)
• Regulation and mandates
  • Government requires firms to provide certain public goods
  • Sets standards and requirements (environmental regulations, building codes, food safety rules)
• User fees and taxes
  • Government charges beneficiaries of public good (national park entrance fees, gasoline tax for highways)
  • Helps fund provision while alleviating free rider problem to some extent
• Property rights and market-based solutions
  • Government establishes property rights or creates markets to manage common resources
  • Aligns private incentives with social efficiency (tradable pollution permits, fishing quotas)
  • Harnesses power of markets to allocate resources while preventing overuse