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economics, a public good is one that cannot or will not be produced for individual profit, since it is difficult to get people to pay for its large beneficial externalities. A public good is defined as an economic good which possesses two properties:
Public goods are "pure" when they possess these properties absolutely. Because empirically pure public goods are small in number (though they include such important cases as national defense and the system of property rights), in common parlance among economists the phrase "public goods" often refers to impure public goods or those confined to particular localities. A public good would be for society as a whole (the public), while a "collective good" is merely for a sub-set of society.
The public goods problem is that a free market is unlikely to produce the theoretically optimum amount of any public good: such important goods as national defense will be underproduced due to the free-rider problem. Some take this as an indication that government should get involved but that is not clear since government is similarly unlikely to produce the theoretically optimum amount of any public good. For example, the power of entrenched government bureaucracies and/or special interests in the private sector may lead to too many resources being allocated to a public good's production. In the case of national defense, this is the alleged problem of the military-industrial complex. Further, centralized governments are not the only substitute for markets: in theory, tradition and decentralized democracy might play this role.
Common examples of public goods include "national defence" and law enforcement (including the system of property rights), public fireworks, lighthouses, clean air and other environmental goods, or information goods such as BambooWeb, software development, authorship and invention.
The provision of a lighthouse has often been used as an example of a public good under the theory that it is difficult to exclude ships from using its services while no ship's use detracts from that of others. However, since in some cases, most of the benefit of a lighthouse accrues to ships using particular ports, lighthouse maintenance fees can profitably be bundled with port fees. This has been been sufficient to fund some actual lighthouses as private goods.
The status of a public good may change over time. Technological progress can have a significant impact on excludability of traditional public goods: Encryption allows broadcasters to sell individual access to their programming. The costs for electronic road pricing have fallen dramatically, paving the way for detailed billing based on actual use.
Economists once believed that proving some good had a public goods aspect constituted an automatic de-facto case for having the government provide or subsidize that good. This idea is no longer at the heart of mainstream economics (see Public choice theory), but it has percolated into the public consciousness leading to a common confusion between two different current meanings of public good. The subject of this essay is the original technical term used by economists, not the more vague term used in political discussion to mean "goods government ought to provide to the public".
Public goods provide a very important example of market failure, in which market-like behavior of individual gain-seeking does not produce efficient results. The production of public goods results in positive externalities which are not remunerated. Because no private organisation can reap all the benefits of a public good which they have produced, economic theory concludes that there will be insufficient incentive to produce it voluntarily. Consumers will take advantage of public goods, without contributing sufficiently to their creation. This is called the free rider problem, or occasionally, the "easy rider problem" (because consumer's contributions will be small but non-zero).
For example, consider national defense, a standard example of a pure public good. A free-rider is an individual who is extremely individualistic, considering benefits and costs that affect only him or her. Suppose this individual thinks about exerting some extra effort to defend the nation. The benefits to the individual of this effort would be very low, since the benefits would be distributed among all of the millions of other people in the country. Further, the free rider knows that he or she cannot be excluded from the benefits of national defense. There is also no way that these benefits can be split up and distributed as individual parcels to people. But just because one person refuses to defend the country does not mean that the nation is not going to be defended. So this person would not voluntarily exert any extra effort, unless there is some inherent pleasure in doing so.
Finally, in the case of information goods, an inventor of a new product may benefit all of society. But hardly anyone is willing to pay for the invention if they can benefit from it for free.
If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. (Each of us is saved from our own individualistic short-sightedness.) One general solution to the problem is for governments or states to impose taxation to fund the production of public goods. One form of taxation is conscription or the "draft". The difficulty is to determine how much funding should be allocated to different public goods, and how the costs should be split (see resource allocation mechanisms, public finance).
Sometimes the government provides public goods using "unfunded mandates". An example is the requirement that every car be fit with a catalytic converter. This may be executed in the private sector, but the end result is predetermined politically: the individually involuntary provision of the public good clean air.
A government may subsidize production of a public good in the private sector. Unlike government provision, subsidies may result in some form of competitive market. The potential for cronyism can be limited with secret bidding for the subsidies or application of the subsidies following clear general principles. Depending on the nature of a public good and a related subsidy, principal agent problems can arise between the citizens and the government or between the government and the subsidized producers; this effect and counter-measures taken to address it can diminish or obliterate the benefits of the subsidy.
Subsidies can also be used in areas with a potential for non-individualism: For instance, a state may subsidize devices to reduce air pollution and appeal to citizens to cover the remaining costs.
The study of collective action shows that public goods are still produced when one individual benefits more from the public good than it costs him to produce it; examples include benefits from individual use, intrinsic motivation to produce, and business models based on selling complement goods. A group that contains such individuals is called a privileged group.
An example of this is BambooWeb, where users derive more benefit from contributing than it costs them to do it. For more discussion on this topic see also Coase's Penguin.
Another solution, which has evolved for information goods, is to create intellectual property laws, such as copyright or patents, covering the public goods. These laws attempt to remove the natural non-excludability by prohibiting reproduction of the good. Although they can solve the free rider problem, the downside of these laws is that they are not Pareto optimal. For example, in the United States, the patent rights given to pharmaceutical companies encourage them to charge high prices (above marginal cost), to advertise to convince patients to nag their doctors to prescribe the drugs, to sue even mild imitators in court, and to lobby for the extension of patent rights. (See rent seeking.)
This near-ubiquitous problem arises because the underlying marginal cost of giving the good to more people is low or zero, but, because of the limits of price discrimination (including both arbitrage and a lack of incentives to provide cheap, high quality copies to those with little ability to pay), those who are unwilling or unable to pay a profit-maximising price, do not get access to the good.
Joseph Schumpeter claimed that the "excess profits" generated by the copyright or patent monopoly will attract competitors that will make technological innovations and thereby end the monopoly. This is a continual process referred to as "Schumpeterian creative destruction". Microsoft, for example, is part of this since it has been increasing its prices (or lowering its products' quality), making increased market shares for Linux and Macintosh largely inevitable.
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 a more public-spirited individual would not do so, getting an inherent pleasure from helping the community. In fact, a public-spirited person 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 minimized. This might imply that even a free-rider would not litter, since his or her action would have such an obvious cost.
This kind of public spirit (nationalism, patriotism, or national chauvinism or sometimes religious or ethnic unity) has 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 TV.
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