A public good is a term used by economists to refer to a product (i.e., a good or service) of which anyone can consume as much as desired without reducing the amount available for others1.
It is the opposite of a private good, which is any product for which consumption by one person reduces the amount available for others, at least until more is produced. Most products are private goods, but some of the most important products are public goods.
Many products have characteristics of both a public good and a private good. Thus, the term public good is usually used to describe products that are dominated by their public good nature, and the term pure public good is used to describe products that do not possess any of the characteristics of a private good.
There is no automatic connection between public goods and the public sector (i.e., government) or between private goods and the private sector (i.e., businesses and consumers). However, it is very often the case that public goods are supplied by the public sector, or with some sort of assistance from it, and in capitalist countries private goods are generally supplied by the private sector.
Public Goods As a Type of Market Failure
Public goods result in what economists call market failure. Market failure is the situation in which a free market economy does not produce results that are efficient for the economy a whole2.
A free market, also referred to as the market mechanism, is the (somewhat idealized) situation in which businesses are allowed to compete only on the basis of the prices and quality of their products, including services associated with those products. There is no interference in this competition from non-market activities such as forcing competitors out of business through collusion with suppliers or customers, threats of costly lawsuits, violence, bribing government officials to pass or enforce legislation unfavorable to competitors, etc. Other types of market failure include externalities and natural monopolies.
Market failure distorts the economy in the sense that it results in different patterns of output, prices and consumption than would occur under free competition. For example, in a free market economy and without corrective action, public goods are likely to be produced and consumed in substantially less quantities than if they were private goods.
Examples of public goods include mathematics, algorithms, melodies, cooking recipes, radio and television broadcasts, languages (both human and programming), computer software, stories, web sites, national defense, clean air, the light from lighthouses and uncongested roads. Examples of private goods include airplanes, apples, books, computers, fingernail polish, flashlights, gold, guns, houses, olive oil, pianos, sheep, radios and shirts.
It can be seen that public goods tend to be intangible items, that is, things which are difficult to grasp with the hands, and that many of them fall into the category of information or knowledge. Private goods are invariably tangible items, that is, items that can be touched, moved and/or seen by humans. Very often both types of goods work in tandem or are symbiotic; for example, a piano, which is a a private good, can be used to play a melody, which is a public good, the methods for creating both a piano and a melody are public goods, and a specific performance of the melody on the piano is a private good3 but a radio or television broadcast of that performance is a public good.
Another example is computer hardware and software. The hardware (i.e., the computer itself and peripheral devices such as monitors, printers, modems and keyboards) are all private goods, because use by one person reduces the amount available for others. But the software (i.e., operating systems and application programs) used on it is a public good because anyone can use as much as desired without reducing the amount available for anyone else4.
Some products may begin to lose some of their characteristic of a public good as a result of negative externalities that occur when consumption rises beyond a certain level. An externality is a cost or benefit that results from an individual or group engaged in an activity to other individuals or groups. Examples of negative externalities include congestion (e.g., on roads or on shipping lanes near lighthouses) and pollution (e.g., air, water or noise). An example of a positive externality is pollination of farmers' crops by bees kept by a beekeeper.
Lack of Excludability
Another important feature of public goods is that they often lack excludability. That is, once the good is produced, it is difficult for the producer to stop people from using it who do not pay for it. This is also referred to as the free rider problem.
One reason for the lack of excludability is that some public goods are just ubiquitously available, at least within a region or through the use of a certain technology, and thus anybody can use them without even receiving them from others. Examples include sunlight, clean air and radio broadcasting.
Another reason is that, because, by definition, anyone can consume as much of a public good as desired without reducing the amount available for others, then any person who purchased, or otherwise obtained, the good or use of it could let others use it, either intentionally or unintentionally, without reducing their own consumption, and they, in turn, could let still others use it, etc. Examples include tunes for humming and recipes for baking cakes.
The lack of excludability means that, in contrast to private goods, businesses cannot sell or charge for each unit of a public good that is consumed. Thus, there is less profit incentive to produce public goods than to produce private goods. If a public good is just as useful to society as a comparable private good, then it can be said that the public good is underproduced and that this is inefficient for the society as a whole. Of course, public goods tend to be very different from private goods, and thus it is not easy to find comparable goods to use to measure the extent of underproduction.
Fortunately, however, there are often other motives for producing public goods other than just the profit motive. History shows that people make discoveries about mathematics and science, write music and computer software, and develop algorithms and surgical techniques very often for the love of their craft, the joy of creation, altruism and/or the desire for fame rather than just for the dream of riches5. Although these motives also exist for the production of some private goods, their effects can be vastly greater in the case of public goods because of the ability of such goods to be consumed in unlimited quantities.
Some definitions include the lack of excludability as a necessary characteristic of a public good. However, although typical, lack of excludability is not only not necessary, but also its inclusion merely confuses the situation. Businesses devote much effort to attempting to make public goods excludable, because it can allow them to charge each user and it can thus be very profitable. However, such goods are still intrinsically public goods because anyone could use as much as desired were this artificial constraint removed6.
Moreover, the excludability of a public good can change over time due to technological advances and governmental action without changes in the underlying nature of the good. For example, the development of low cost encryption and descrambling equipment allows broadcasters to restrict access to their programming that was formerly free, and improved copy protection techniques could make digital media more excludable. Also, the costs for electronic road pricing have fallen dramatically, paving the way for detailed billing based on actual use7.
The profit potential of making public goods excludable can, at least in some cases, result in the production of more and/or better public goods. For example, the ability of broadcasters to charge viewers for access to television programs can provide an incentive to create new programs and reduce or eliminate advertising. However, the excluding of people from the consumption of public goods can be inefficient for the economy as a whole in some cases. This is particularly true for public goods that already exist or that would be produced even in the absence of any profit incentive.
Other Possible Solutions
The major issues with regard to pubic goods are (1) how to most efficiently provide for the production of those that are underproduced and (2) how to measure underproduction and the optimal level of production. The latter exists because, in contrast to private goods, public goods are generally not sold and bought in the free market, and thus there is often little or no profit incentive to produce them and and there are no price or profit signals about how much to produce.
Among the means for promoting and financing the production of public goods when the profit motive and voluntary production motives are insufficient are donations, grants, the bundling with advertisements, and government intervention. Government intervention can include direct production, subsidies or tax benefits to private sector producers, unfunded mandates, taking steps to make public goods excludable, and appealing to the patriotism or public spirit nature of people.
Each of these approaches that involves the public sector has its own problems. One problem that may apply to all of them is that they can over-compensate; that is, they can result in too many resources being allocated to a public good's production because of the strong tendency of government bureaucrats to strive to increase their budgets year after year in order to enhance their own positions and increase their power. In the case of national defense, this is the alleged problem of the so-called military-industrial complex8.
Unfunded mandates can be imposed on lower levels of government (e.g., on state governments by the federal government), on private businesses and on individuals. An example of an unfunded mandate that is imposed on individuals, businesses and other organizations to provide a public good is the requirement that automobiles be fitted with equipment to reduce their toxic emissions and thereby reduce air pollution. An example of an unfunded mandate that is imposed mainly on individuals to provide a public good (i.e., national defense) is the military draft; that is, individuals are forced to serve in the military against their free will and often with compensation far below what they would receive in other employment.
Governments sometimes subsidize the provision of public goods by the private sector. Unlike direct government provision, subsidies may result in some form of competitive market. Although subsidies add to the potential for political corruption (e.g., alliances between political insiders and businesses receiving subsidies), there are ways that the potential for corruption and the economic inefficiencies that it engenders can be minimized, including through the use of clearly defined rules for allocating the subsidies.
The enactment of so-called intellectual property legislation, such as patent and copyright laws, is one of the most effective means of making public goods excludable. However, there are serious problems with such laws, including the facts that (1) there is tremendous economic, and thus political, pressure to have the laws grant far more power than is necessary to promote the development and production of public goods9, including for categories of goods for which such laws are not necessary10, (2) they can result in exclusion that is inefficient for the economy as a whole and (3) they can actually discourage, rather than encourage, the development and production of public goods in some cases11.
2Economic efficiency is a difficult concept to define, and there is no single definition that satisfies everyone. One commonly used definition, called Pareto efficiency (after the Italian economist Vilfredo Pareto), is the situation in which nobody can be made better off without making someone else worse off.
3A specific live performance on the piano would be considered a private good because a concert hall can only accommodate a limited number of people. The objection might be raised that the performance could be broadcast in a number of additional rooms and even outdoors by loudspeakers and television monitors. However, this changes the nature of the product, as many music lovers strongly prefer to hear music directly from the musical instrument(s) rather than through electronic means. This is the reason that the great opera houses and concert halls are designed so that the instruments and voices can be heard without amplification.
4This purposely ignores the issue of commercial software licenses, which frequently state that one copy of a program is permitted to be used only on one computer. Software licenses do not make a public good a private good; they are merely an attempt to make a public good excludable.
5For example, for a list of reasons that some programmers enthusiastically develop free software in the absence of direct monetary compensation, see Incentives to Develop Free Software, The Linux Information Project, July 2005.
6It should also be noted in this context that it can likewise be difficult to exclude some private goods, i.e., those for which it is difficult to assign and enforce property rights. The most obvious examples are natural resources, such as fish in bodies of water and rare plants in largely uninhabited areas.
7Thus, for example, a number of countries are installing, or planning to install, systems that record the license plates of vehicles as they pass fixed points on the road networks and then send their owners bills for road usage.
8This is a term used to describe the situation in which the military in some countries receives considerably more funding than is required for legitimate national defense (and in some cases starts unjustified wars), because it strengthens the position and compensation of government bureaucrats and increases profits of companies that supply munitions and other products to the military.
9Perhaps the most obvious example is the situation for copyright in the U.S., which was extended with the controversial Copyright Term Extension Act of 1998 by 20 years to the life of the author plus 70 years for individuals and to 95 years for corporations.
10For example, software patents, according to their critics, are not necessary to promote innovation in the software field. They point out that almost all of the great advances in software were not patented and are freely available for anyone to use. The analogy is made with mathematics, which by law is not patentable, but which likewise continues to advance.
11For example, critics of software patents claim that they can substantially retard the development of software because computer programs are typically very complex, consisting of many thousands, or even millions, of lines of code. Thus, it is extremely difficult for all but the very largest and richest software companies to be certain that they are not infringing on other companies' patents. Moreover, even if such companies were to be convicted of infringement, they might not be too worried because it is relatively easy for them to pay the other party for the use of their patents.
Created February 16, 2006.