Public Goods

So what's a public...bad? The bathrooms at the Y?

Public goods are things that anyone is allowed to use, and using them doesn’t reduce the usability for others.

One of the last great public goods, public libraries, was suggested by an economist to be replaced by Amazon bookstores in a Forbes article, which was then taken down. Why? Twitter users explained to the out-of-touch economist all of the economic benefits that come from public libraries that would be lost if they were replaced with Amazon bookstores.

Think: free internet for school kids who don’t have it at home for homework (and the economist pointed out, rightly, that for the cost savings in selling the real estate of the library along with the new taxes the condos would bring in, the internet access for every single citizen of the city could be covered 10x over), free books for children and adults of all ages (same deal), after-school programs (same deal), literacy programs (same deal), inmate re-entry programs that teach computer skills (same deal), community events, and more.

Sewer systems and national defense can also be considered public goods. How "good" are the uses or applications of precious scarce resources in this venue? Maybe time will tell. but you'd guess that, as the country gets relatively poorer-resourced, tough decisions will have to get made.

Countries with higher taxes typically have more public goods. The government allocates or re-allocates the savings of the rich, and oftentimes higher quality public goods.

Public goods are “nonexcludable” and “nonrivalrous.” Nonexcludability means that nobody is excluded...even if someone didn’t cough up any cash to receive the benefits of the good. Whether you paid your taxes or not, you can go to the park and the library. Didn’t pay...doesn’t matter. Nonrivalrous means that more and more people can consume the good without additional costs, and without preventing others from consuming the good. Just because you’re breathing the air doesn’t stop your neighbor from doing so. You can take your dog on a walk in the park, which won’t stop others from indulging in the park’s, um, park-ness.

To contrast, what’s excludable and rivalrous. i.e. the opposite of a public good? How about…roller coasters? A roller coaster is rivalrous, since there can only be so many people on the rollercoaster at once. If the theme park is conforming to safety regulations, anyway. It’s also excludable; you have to pay to get into the theme park to ride the roller coaster, because theme parks care about profits. Roller coasters are definitely private goods.

Anyway, public goods sound pretty great, right? There’s something utopic about them: everybody can use them, at the same time, and without paying. But they have their fair share of problems, just like private goods.

The biggest issue is the “free rider problem,” which is when people take advantage of public goods by not paying for their fair share of the good. For instance, if you’ve ever watched a firework show from afar for free when it cost money to get closer, then you’re a free rider. You benefited from the fireworks show, but didn’t pay for it. And you couldn’t be excluded from watching since it’s, like...in the sky.

When people get the benefits without having to pay for the costs of that benefit, many goods and services that people would otherwise be willing to pay for will disappear, or never make it to the market at all. Take our fireworks example: if everybody decided to free ride and watch the fireworks show from a bit farther away for free, and nobody bought tickets to the firework show, there is probably not going to be one next year.

The moral of the story? Too much free riding kills firework shows (and other goods). Which is why excludability and property lines are so important. A theme park wouldn’t last long if there wasn’t a wall surrounding it, and you could just walk in and ride roller coasters for free.

The free rider problem goes hand-in-hand with positive externalities. Positive externalities are benefits somebody gets without paying for them...and without necessarily asking for them. For instance, if you love firework shows and happen to have a great view of a firework show from your own backyard, you just got a positive externality. The fireworks show producer can’t charge you for viewing the show. Maybe there’d be more firework shows if they could make them more excludable, reducing the positive vibes...er, positive externalities...they’re giving out for free.

So what makes our public goods like parks and libraries...work? The free rider problem is avoided, because those goods are typically paid for by the government, which means its funded by taxes. And who pays taxes? The public does. Which means free riding isn’t a problem, because most people are already paying for the parks and libraries, whether they like it or not.

People who aren’t paying taxes are free riding when they hang out in the park and the library, but because the numbers are few, and it doesn’t affect the funding of those goods, it’s not problematic enough to make libraries and parks shut down.

What else are you free riding if you’re not paying your fair share of taxes? Things that everyone in the country benefits from...like national defense, access to clean water, and public radio.

Free riding that isn’t okay? The free riding Nicholas Cage does in Ghostrider.