Public Goods

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To understand how public goods differ from other goods and the problems they present for society, let's consider an example: a fireworks display. This good is not exdudable because it is impossible to prevent someone from seeing fireworks, and it is not rival in consumption because one person's enjoyment of fireworks does not reduce anyone else's enjoyment of them.

The Free-Rider Problem

TV- citizens C»f Smalltown, U.S.A.. like seeing fireworks on the Fourth of July. Each of the town's 500 residents places a $10 value on the experience for a to Ml benefit of $5,000. The cost of putting on a fireworks display is SI XMO. Because the $5,000 benefit exceeds the «.IjOCO cost, it is efficient for Smalltown to have a fireworks display on the Fourth of July.

Would the private market produce the efficient outcome? Probably not. Imagine that Ellen, a Smalltown entrepreneur, decided to put on a fireworks display, Ellen would surely have trouble selling tickets to the event because her potential customers would quickly figure out that they could see the fireworks even without a tkket. Because fireworks are not excludable, people have an incentive to be tree rider free riders. A free rider is a person who receives the benefit of a good but does not a peion who racoivoi pay for it. Because people would have an incentive to be free riders rather than ttw> b*n*fit of a good ticket buyers, the market would fail to provide the effkirnt outcome, but »voids paying for it One way to view this market failure is that it arises because of an externality.

If Ellen puts on the fireworks display, she confers an external benefit on those who see the display without paying for it. When deciding whether to put on the display, however, Ellen docs not take the external benefits into account. Even though the fireworks display is socially desirable, it is not profitable. As a result, Ellen makes the privately rational but socially inefficient decision not to put on the display.

Although the private market fails to supply the fireworks display demanded by Smalltown residents, the solution to Smalitown's problem is obvious: The local government can sponsor a Fourth of July celebration. The town council can raise everyone's taxes by $2 and use the revenue to hire Ellen to produce the fireworks. Everyone in Smalltown is better off by W—the $10 in value from the fireworks minus Ihe £2 tax bill. Ellen can help Smalltown reach the efficient outcome as a public employee even though she could not do $*> as a private entrepreneur.

The story of Smalltown is simplified but realistic. In fact, many local governments in the United States pay tor fireworks on the Fourth of July. Moreover, the story shows a general lesson about public goods; Because public goods are not excludable, the free-rider problem prevents the private market from supplying tl>em. The government, however, can potentially remedy the problem. If the government decides that the total benefits of a public good exceed its costs, it can provide the public good, pay for it with tax revenue, and make everyone better off.

Some Important Public Goods

There are many examples of publk goods. Here we consider three of the most important-

National Defense The defense of a country from foreign aggressors is a classic example of a public good. Once the country is defended, it is impossible to prevent any single person from enjoying the benefit of this defense. Moreover, when one person enjoys the benefit of national defense, he does not reduce the benefit to anyone else. Thus, national defense is neither excludable nor rival in consumption.

National defense is also one of the most expensive public goods- in 2007, the U.S. federal government spent a total of $55.1 billkin on national defense, more than $1,800 per person. People disagree about whether this amount is too small or too targe, but almost no one doubts that some government spending for national defense ts necessary. Even economists who advocate small government agree that the national defense is a public good the government should provide.

Basic Research Knowledge is created through research. In evaluating the appropriate public policy toward knowledge creation, it is important to distinguish general knowledge from specific technological knowledge. Specific technological knowledge, such as the invention of a longer-lasting battery, a smaller microchip, or a better digital music player, can be patented. The patent gives the inventor the exclusive right to the knowledge he or she has created for a period of time. Anyone else who wants to use the patented information must pay the inventor for the right to do so. In other words, the patent makes the knowledge created by the inventor excludable.

By contrast, general knowledge is a public good. For example, a mathematician cannot patent a theorem. Once a theorem is proved, the knowledge is not excludable: The theorem enters society's general pool of knowledge that anyone can use without charge. The theorem is also not rival in consumption: One person's use of the theorem does not prevent any other person from using the theorem.

Profit-seeking firms spend a lot on research trying to develop new products that they can patent and sell, but they do not spend much on basic research. Their incentive, instead, is to free ride on the general knowledge crcated by others. Asa resull, in the absence of any public policy, society would devote too few resources to creating new knowledge.

The government tries to provide the public good of general knowledge in various ways. Government agencies, such as the National Institutes of Health and the National Science Foundation, subsidize basic research in medicine, mathematics. physics, chemistry, biology, and even eo>nomics. Some people justify government funding of the space program on the grounds that it adds to society's pool of knowledge (although many scientists are skeptical of the scientific value of manmd space travel). Determining the appropriate level of government support for these endeavors is difficult because the benefits are hard to measure. Moreover, the members of Congress who appropriate funds for research usually have little expertise in science and. therefore, are not in the best position to judge what lines of research will produce the largest benefits. So. while basic research is surely a public good, we should not be surprised if the public sector fails to pay for the right amount and the right kinds

Fighting Poverty Many government programs are aimed at helping the poor. The welfare system (officially called Temporary Assistance for Needy Families) provides a small income for some poor families. Similarly, the Food Stamp program subsidizes the purchase of food for those with low incomes, and various government housing programs make shelter more affordable. These antipov-erty programs are financed by taxes paid by families that are financially more f j successful.

IEconomists disagree among themselves about what role the government should £ play in fighting poverty. Although we discuss this debate more fully in Chapter 20, here we note one important argument: Advocates of antipoverty programs i; claim that fighting poverty is a public good, Even if everyone prefers living in a £ i society without poverty, fighting poverty is not a "good" that private actions will i: adequately provide.

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To sec why. suppose someone tried to organize a group of wealthy individuals to try to eliminate poverty. They would be providing a public good. This good would not be rival in consumption: One person's enjoyment of living in a society without poverty would not reduce anyone else's enjoyment of it. I he good would not be excludable: Once poverty is eliminated, no one can be prevented from taking pleasure in this fact. As a result, there would be a tendency for people to free ride on the generosity of others, enjoying the benefits of poverty eiiminatk>n without contributing to the cause-

Because of the free-rider problem, eliminating poverty through private charity will probably not work. Yet government action can solve this problem. Taxing the wealthy to rain- the living standards of the poor can potentially make everyone better off The poor arc better off because they now enjoy a higher standard of liv ing, and those paying the taxes are better off because they enjoy living in a society with less poverty.

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