Private companies find it difficult to produce public goods. If a good or service is nonexcludable, like national defense, so that it is impossible or very costly to exclude people from using this good or service, then how can a firm charge people for it?
There is a dilemma with the Prisoner’s Dilemma, though. See the Work It Out feature.
The Role of Government in Paying for Public Goods
The key insight in paying for public goods is to find a way of assuring that everyone will make a contribution and to prevent free riders. For example, if people come together through the political process and agree to pay taxes and make group decisions about the quantity of public goods, they can defeat the free rider problem by requiring, through the law, that everyone contributes.
However, government spending and taxes are not the only way to provide public goods. In some cases, markets can produce public goods. For example, think about radio. It is nonexcludable, since once the radio signal is broadcast, it would be very difficult to stop someone from receiving it. It is non-rival, since one person listening to the signal does not prevent others from listening as well. Because of these features, it is practically impossible to charge listeners directly for listening to conventional radio broadcasts.
Radio has found a way to collect revenue by selling advertising, which is an indirect way of “charging” listeners by taking up some of their time. Ultimately, consumers who purchase the goods advertised are also paying for the radio service, since the station builds in the cost of advertising into the product cost. In a more recent development, satellite radio companies, such as SiriusXM, charge a regular subscription fee for streaming music without commercials. In this case, however, the product is excludable—only those who pay for the subscription will receive the broadcast.
Some public goods will also have a mixture of public provision at no charge along with fees for some purposes, like a public city park that is free to use, but the government charges a fee for parking your car, for reserving certain picnic grounds, and for food sold at a refreshment stand.
Read this article to find out what economists say the government should pay for.
In other cases, we can use social pressures and personal appeals, rather than the force of law, to reduce the number of free riders and to collect resources for the public good. For example, neighbors sometimes form an association to carry out beautification projects or to patrol their area after dark to discourage crime. In low-income countries, where social pressure strongly encourages all farmers to participate, farmers in a region may come together to work on a large irrigation project that will benefit all. We can view many fundraising efforts, including raising money for local charities and for the endowments of colleges and universities, as an attempt to use social pressure to discourage free riding and to generate the outcome that will produce a public benefit.
Common Resources and the “Tragedy of the Commons”
There are some goods that do not fall neatly into the categories of private good or public good. While it is easy to classify a pizza as a private good and a city park as a public good, what about an item that is nonexcludable and rivalrous, such as the queen conch?
In the Caribbean, the queen conch is a large marine mollusk that lives in shallow waters of sea grass. These waters are so shallow, and so clear, that a single diver may harvest many conch in a single day. Not only is conch meat a local delicacy and an important part of the local diet, but artists use the large ornate shells and craftsmen transform them. Because almost anyone with a small boat, snorkel, and mask, can participate in the conch harvest, it is essentially nonexcludable. At the same time, fishing for conch is rivalrous. Once a diver catches one conch another diver cannot catch it.
We call goods that are nonexcludable and rivalrous common resources. Because the waters of the Caribbean are open to all conch fishermen, and because any conch that you catch is a conch that I cannot catch, fishermen tend to overharvest common resources like the conch.
The problem of overharvesting common resources is not a new one, but ecologist Garret Hardin put the tag “tragedy of the commons” to the problem in a 1968 article in the magazine Science. Economists view this as a problem of property rights. Since nobody owns the ocean, or the conch that crawl on the sand beneath it, no one individual has an incentive to protect that resource and responsibly harvest it. To address the issue of overharvesting conch and other marine fisheries, economists have advocated simple devices like fishing licenses, harvest limits, and shorter fishing seasons. One approach that has been turned to more recently is the implementation of catch shares, whereby regulators establish a total allowable catch, and then fishermen are allocated a portion of that total allowable catch. Catch shares appear to slow the race to fish. When the population of a species drops to critically low numbers, governments have even banned the harvest until biologists determine that the population has returned to sustainable levels. In fact, such is the case with the conch, the harvesting of which the government has effectively banned in the United States since 1986.
The tragedy of the commons is a frequent economic and social framework for discussions about a range of common resources, even extending into digital resources such as open media repositories and online libraries. Prominent economist Elinor Ostrom, the first woman to receive the Nobel Prize in Economics, proposed an alternate version, sometimes referred to as the "non-tragedy of the commons." After extensive fieldwork in areas as diverse as Indonesia, Kenya, Maine (U.S.), and Nepal, she challenged the notion that people would only avoid depletion of common resources if they were forced to by regulatory laws and property rights. She noted that farmers working shared land could communicate and cooperate in order to maximize and preserve the fields over time. She argued that when those who benefit most from a resource are in close proximity to it (like a farm field that directly serves a town), the resource is better managed without external influence.
Visit this website for more on the queen conch industry.
Positive Externalities in Public Health Programs
One of the most remarkable changes in the standard of living in the last several centuries is that people are living longer. Scientists believe that, thousands of years ago, human life expectancy ranged between 20 to 30 years. By 1900, average life expectancy in the United States was 47 years. By 2015, life expectancy was 79 years; due to COVID-19, life expectancy declined slightly to 77 years in 2020. Most of the gains in life expectancy in the history of the human race happened in the twentieth century.
The rise in life expectancy seems to stem from three primary factors. First, systems for providing clean water and disposing of human waste helped to prevent the transmission of many diseases. Second, changes in public behavior have advanced health. Early in the twentieth century, for example, people learned the importance of boiling bottles before using them for food storage and baby’s milk, washing their hands, and protecting food from flies. More recent behavioral changes include reducing the number of people who smoke tobacco and precautions to limit sexually transmitted diseases. Third, medicine has played a large role. Scientists developed immunizations for diphtheria, cholera, pertussis, tuberculosis, tetanus, and yellow fever between 1890 and 1930. Penicillin, discovered in 1941, led to a series of other antibiotic drugs for bringing infectious diseases under control. In recent decades, drugs that reduce the risks of high blood pressure have had a dramatic effect in extending lives.
These advances in public health have all been closely linked to positive externalities and public goods. Public health officials taught hygienic practices to mothers in the early 1900s and encouraged less smoking in the late 1900s. Government funded many public sanitation systems and storm sewers because they have the key traits of public goods. In the twentieth century, many medical discoveries emerged from government or university-funded research. Patents and intellectual property rights provided an additional incentive for private inventors. The reason for requiring immunizations, phrased in economic terms, is that it prevents spillovers of illness to others—as well as helping the person immunized.
The Benefits of Voyager I Endure
While we applaud the technology spillovers of NASA’s space projects, we should also acknowledge that those benefits are not shared equally. Economists like Tyler Cowen, a professor at George Mason University, are seeing increasing evidence of a widening gap between those who have access to rapidly improving technology, and those who do not. According to Cowen, author of the 2013 book, Average Is Over: Powering America Beyond the Age of the Great Stagnation, this inequality in access to technology and information is going to deepen the inequality in skills, and ultimately, in wages and global standards of living.
