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[AnupdatedversionofthisarticlecanbefoundatPublicGoodsinthe2ndedition.]

osteconomicargumentsforgovernmentinterventionarebasedontheideathatthe

marketplacecannotprovidepublicgoodsorhandleexternalities.Publichealthandwelfareprograms,education,roads,researchanddevelopment,nationalanddomesticsecurity,andacleanenvironmentallhavebeenlabeledpublicgoods.

Publicgoodshavetwodistinctaspects"nonexcludability"and"nonrivalrousconsumption."Nonexcludabilitymeansthatnonpayerscannotbeexcludedfromthebenefitsofthegoodorservice.Ifanentrepreneurstagesafireworksshow,forexample,peoplecanwatchtheshowfromtheirwindowsorbackyards.Becausetheentrepreneurcannotchargeafeeforconsumption,thefireworksshowmaygounproduced,evenifdemandfortheshowisstrong.

Thefireworksexampleillustratesthe"freerider"problem.Evenifthefireworksshowisworthtendollarstoeachperson,noonewillpaytendollarstotheentrepreneur.Eachpersonwillseekto"freeride"byallowingotherstopayfortheshow,andthenwatchforfreefromhisorherbackyard.Ifthefreeriderproblemcannotbesolved,valuablegoodsandservices,onesthatpeoplewantandotherwisewouldbewillingtopayfor,willremainunproduced.

Thesecondaspectofpublicgoodsiswhateconomistscallnonrivalrousconsumption.Assumetheentrepreneurmanagestoexcludenoncontributorsfromwatchingtheshow(perhapsonecanseetheshowonlyfromaprivatefield).Apricewillbechargedforentrancetothefield,andpeoplewhoareunwillingtopaythispricewillbeexcluded.Ifthefieldislargeenough,however,exclusionisinefficientbecauseevennonpayerscouldwatchtheshowwithoutincreasingtheshow'scostordiminishinganyoneelse'senjoyment.Thatisnonrivalrouscompetitiontowatchtheshow.

Externalitiesoccurwhenoneperson'sactionsaffectanotherperson'swellbeingandtherelevantcostsandbenefitsarenotreflectedinmarketprices.Apositiveexternalityariseswhenmyneighborsbenefitfrommycleaningupmyyard.IfIcannotchargethemforthesebenefits,Iwillnotcleantheyardasoftenastheywouldlike.(Notethatthefreeriderproblemandpositiveexternalitiesaretwosidesofthesamecoin.)Anegativeexternalityariseswhenoneperson'sactionsharmanother.Whenpolluting,factoryownersmaynotconsiderthecoststhatpollutionimposesonothers.Policydebatesusuallyfocusonfreeriderandexternalitiesproblems,whichareconsideredmoreseriousproblemsthannonrivalrousconsumption.

Whilemostpeopleareunawareofit,marketsoftensolvepublicgoodsandexternalitiesproblemsinavarietyofways.

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1/19/2016 PublicGoodsandExternalities,byTylerCowen:TheConciseEncyclopediaofEconomics|LibraryofEconomicsandLiberty

http://www.econlib.org/library/Enc1/PublicGoodsandExternalities.html 2/3

Businessesfrequentlysolvefreeriderproblemsbydevelopingmeansofexcludingnonpayersfromenjoyingthebenefitsofagoodorservice.Cabletelevisionservices,forinstance,scrambletheirtransmissionssothatnonsubscriberscannotreceivebroadcasts.Boththroughouthistoryandtoday,privateroadshavefinancedthemselvesbychargingtollstoroadusers.Othersupposedpublicgoods,suchasprotectionandfireservices,arefrequentlysoldthroughtheprivatesectoronafeebasis.

Publicgoodscanalsobeprovidedbybeingtiedtopurchasesofprivategoods.Shoppingmalls,forinstance,provideshopperswithavarietyofservicesthataretraditionallyconsideredpublicgoods:lighting,protectionservices,benches,andrestrooms,forexample.Chargingdirectlyforeachoftheseserviceswouldbeimpractical.Therefore,theshoppingmallfinancestheservicesthroughreceiptsfromthesaleofprivategoodsinthemall.Thepublicandprivategoodsare"tied"together.Privatecondominiumsandretirementcommunitiesalsoareexamplesofmarketinstitutionsthattiepublicgoodstoprivateservices.Monthlymembershipduesareusedtoprovideavarietyofpublicservices.

Lighthousesareoneofthemostfamousexamplesthateconomistsgiveofpublicgoodsthatcannotbeprivatelyprovided.Economistshavearguedthatifprivatelighthouseownersattemptedtochargeshipownersforlighthouseservices,afreeriderproblemwouldresult.YetlighthousesoffthecoastofnineteenthcenturyEnglandwereprivatelyowned.Lighthouseownersrealizedthattheycouldnotchargeshipownersfortheirservices.Sotheydidn'ttryto.Instead,theysoldtheirservicetotheownersandmerchantsofthenearbyport.Portmerchantswhodidnotpaythelighthouseownerstoturnonthelightshadtroubleattractingshipstotheirport.Asitturnsout,oneoftheeconomicsinstructors'mostcommonlyusedexamplesofapublicgoodthatcannotbeprivatelyprovidedisnotagoodexampleatall.

Otherpublicgoodsproblemscanbesolvedbydefiningindividualpropertyrightsintheappropriateeconomicresource.Cleaningupapollutedlake,forinstance,involvesafreeriderproblemifnooneownsthelake.Thebenefitsofacleanlakeareenjoyedbymanypeople,andnoonecanbechargedforthesebenefits.Oncethereisanowner,however,thatpersoncanchargehigherpricestofishermen,boaters,recreationalusers,andotherswhobenefitfromthelake.PrivatelyownedbodiesofwaterarecommonintheBritishIsles,where,notsurprisingly,lakeownersmaintainquality.

Welldefinedpropertyrightscansolvepublicgoodsproblemsinotherenvironmentalareas,suchaslanduseandspeciespreservation.Thebuffalonearedextinctionandthecowdidnotbecausecowscouldbeprivatelyownedandhusbandedforprofit.Today,privatepropertyrightsinelephants,whales,andotherspeciescouldsolvethetragedyoftheirnearextinction.InAfrica,forinstance,elephantpopulationsaregrowinginZimbabwe,Malawi,Namibia,andBotswana,allofwhichallowcommercialharvestingofelephants.Since1979Zimbabwe'selephantpopulationrosefrom30,000toalmost70,000today,andBotswana'swentfrom20,000to68,000.Ontheotherhand,incountriesthatbanelephanthuntingKenya,Tanzania,andUganda,forexamplethereislittleincentivetobreedelephantsbutgreatincentivetopoachthem.Inthosecountrieselephantsaredisappearing.TheresultisthatKenyahasonly16,000elephantstodayversus

1/19/2016 PublicGoodsandExternalities,byTylerCowen:TheConciseEncyclopediaofEconomics|LibraryofEconomicsandLiberty

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140,000whenitsgovernmentbannedhunting.Since1970,Tanzania'selephantherdhasshrunkfrom250,000to61,000Uganda'sfrom20,000toonly1,600.

Propertyrightsarealesseffectivesolutionforenvironmentalproblemsinvolvingtheair,however,becauserightstotheaircannotbedefinedandenforcedeasily.Itishardtoimagine,forinstance,howmarketmechanismsalonecouldpreventdepletionoftheearth'sozonelayer.Insuchcaseseconomistsrecognizethelikelynecessityofaregulatoryorgovernmentalsolution.

Contractualarrangementscansometimesbeusedtoovercomeotherpublicgoodsandexternalitiesproblems.Iftheresearchanddevelopmentactivitiesofonefirmbenefitotherfirmsinthesameindustry,thesefirmsmaypooltheirresourcesandagreetoajointproject(antitrustregulationspermitting).Eachfirmwillpaypartofthecost,andthecontributingfirmswillsharethebenefits.Inthiscontexteconomistssaythattheexternalitiesare"internalized."

Contractualarrangementssometimesfailtosolvepublicgoodsandexternalitiesproblems.Thecostsofbargainingandstrikinganagreementmaybeveryhigh.Somepartiestotheagreementmayseektoholdoutforabetterdeal,andtheagreementmaycollapse.Inothercasesitissimplytoocostlytocontactanddealwithallthepotentialbeneficiariesofanagreement.Afactory,forinstance,mightfinditimpossibletonegotiatedirectlywitheachaffectedcitizentodecreasepollution.

Theimperfectionsofmarketsolutionstopublicgoodsproblemsmustbeweighedagainsttheimperfectionsofgovernmentsolutions.Governmentsrelyonbureaucracyandhaveweakincentivestoserveconsumers.Therefore,theyproduceinefficiently.Furthermore,politiciansmaysupplypublic"goods"inamannertoservetheirowninterests,ratherthantheinterestsofthepublicexamplesofwastefulgovernmentspendingandporkbarrelprojectsarelegion.Governmentoftencreatesaproblemof"forcedriders"bycompellingpersonstosupportprojectstheydonotdesire.Privatesolutionstopublicgoodsproblems,whenpossible,areusuallymoreefficientthangovernmentalsolutions.

AbouttheAuthor

TylerCowenisaneconomicsprofessoratGeorgeMasonUniversityanddirectoroftheJamesM.BuchananCenterandoftheMercatusCenter.

FurtherReading

Benson,Bruce.TheEnterpriseofLaw.1990.

Cowen,Tyler.TheTheoryofMarketFailure:ACriticalEvaluation.1988.

Klein,Daniel."TieinsandtheMarketProvisionofPublicGoods."HarvardJournalofLawandPublicPolicy10(Spring1987):45174.

McCallum,SpencerHeath.TheArtofCommunity.1970.

Rothbard,MurrayN.ForaNewLiberty.1978.

Woolridge,WilliamC.UncleSam.MonopolyMan.1970.

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