The Joy of Economics:  Making Sense out of Life
 Robert J. Stonebraker, Winthrop University
 

Public Goods

            All for one, one for all.
                                               ...Alexander Dumas

            Fireworks rock.  My wife loves the colors, I love the noise. I even proposed on July 4th; just before the pyrotechnics began. 

            Regrettably, we've seen relatively few professional displays.  We lived for years in a somewhat rural area with no fireworks extravaganzas.  An area mall ran a show briefly, but the effort was pitiful and consisted only of about 20 rockets set off at thirty-second intervals.  It folded after a few years.  A local service club then took up the challenge, rented out the county fairgrounds and put on a decent display for a $5 entrance fee.  We went one year and enjoyed the show, but got stuck in a traffic jam trying to exit the parking lot through a single exit onto a single narrow road.  The next year we watched the show from a neighboring field; we saw the display just as well but avoided both the $5 fee and the subsequent traffic.  Others caught on. Within three years, the neighboring fields were filled with spectators and the fairground stands were almost empty.  The sponsoring club went belly up financially and the fireworks ended.  Oops.

            I should have known.  Fireworks displays never will be produced efficiently by private markets.  They are public goods; they require collective action for efficient production.

Public good characteristics

            Public goods have two main characteristics.  The first is non-exclusion.  Once the good is produced, it is accessible to all comers, whether or not they pay.  Non-buyers cannot be excluded from reaping benefits from the good.  Once the local service club set off the fireworks, it could not prevent spectators in nearby fields from watching.  We could see and hear even though we did not pay the $5 fee.  In the jargon of economists, we were free riders, people who were enjoying products paid for by others.  We consumed external benefits provided by paying customers.

            The motive to free ride is strong.  Imagine walking through your neighborhood grocery, filling your cart with hot dogs and other essential items, heading to the checkout line, and then having the clerk declare that you have the option either of paying for the groceries or taking them for free.  Which option would you choose?  Me, too.  But if all of us choose to free ride, to walk out without paying, how will the grocery remain in business?  Similarly, if all of us free ride on fireworks displays, how will the local providers recoup expenses?  Do you see the problem?  When producers cannot exclude non-buyers, we free ride.  When we free ride, suppliers cannot recover costs and will not produce.

            The second characteristic of public goods is non-rivalrous consumption. In most cases, one person's consumption competes with others'. If I eat an ice cream cone, the cone no longer is available for you.  We both cannot consume the same cone; we are rivals for its consumption.  However, suppose I sit in a field and watch fireworks.  Does that stop you from doing the same?  Of course not.  My consumption of the fireworks does not interfere with yours.  We can enjoy them simultaneously; our consumption is non-rivalrous.  Can you think of other examples?  How about using a traffic light at a busy intersection?  Or reading an exit sign along an interstate highway?   Or listening to your favorite music on the radio?  Many consumers can simultaneously use the same traffic light, read the same exit sign, and listen to the same tunes.

            Think about that.  If consumption is non-rivalrous, the marginal cost of allowing one more consumer to use the product often is zero.  Allowing one person to use the traffic light or exit sign or radio station adds nothing to the total cost of these operations.  That means even if we could exclude non-buyers, it would be inefficient to do so.  For example, suppose we electronically monitor each person who tunes into a radio station and send them a bill of $2 per hour for their listening enjoyment.  If Jamal's marginal benefit is $1.20 per hour he would not listen.  Why spend $2 for listening worth only $1.20?  Yet, from society's view, there is no reason to exclude Jamal.  His MB of $1.20 exceeds the MC to society of zero.  Excluding him saves society nothing, but costs $1.20 in lost benefits to Jamal. 

Collective action

            Collective action offers an escape.  Suppose that a fireworks display costing $20,000 will create $3 of benefit for each of 10,000 community residents.  Collectively the $30,000 of community benefits exceeds the $20,000 cost, but no individual gets enough benefit to justify paying the $20,000 cost unilaterally.  And because of free-rider problems, no one can effectively charge others for the show.  Even though the display is socially efficient, no one has an incentive to produce the display. 

            Luckily, goods that make collective sense can be produced through collective action.  If the 10,000 residents get together, form a "government" and then vote to impose a $2 per person tax they could raise the $20,000 for the display.  Each resident would win; each gains $1 of surplus value from the deal (the $3 of MB minus the $2 tax).  The mandatory tax forces each resident to pay his/her fair share of the expense; the tax stops us from being able to free ride. The government acts as our collective representative in providing goods that are in our collective best interest.

            Think for a moment about what real-world governments buy.  First, they do finance fireworks displays.  Major cities routinely devote public funds to Fourth of July events.  More importantly they buy police protection, fire protection, national defense, street lights and highway systems.  All of these have at least some public good characteristics.  For example, when a police officer arrests a drunken driver, everyone on the highway benefits whether they help pay for the police or not. Non-buyers cannot be excluded.  Similarly, once national defense is supplied, there is no way to exclude any person or group from its protection -- its benefits accrue to all and cannot be sold to individuals.  Toll roads theoretically could keep free riders off our highways but, given current technology, turning all roads into pay-as-you-go highways is impractical.  As a result, we rely on government agencies to provide such goods.  We impose taxes on ourselves to raise the needed funds (and to avoid free-riding) and purchase the goods collectively.

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Testing Yourself

To test your understanding of the major concepts in this reading, try answering the following:

1.      Describe and discuss the characteristics of public goods and give examples.

2.      Explain "free riders" and why they occur with public, but not private, goods.

3.      Explain why public goods cannot be produced without collective or government action.

4.      Explain why charging people to use products with non-rivalrous consumption is not efficient.

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