We can distinguish four different types of goods along two dimensions. Firstly, are they excludable? This simply means: can we prevent another person from using the good? We can obviously not share most things like books, food, clothes, housing etc.
We cannot prevent another person from watching a firework show. The other
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dimension is rivalry. This means, does the use of the good decrease its quantity or quality. Fireworks do not become worse, if another person watches them, but a public park does become less pleasant, when overcrowded. If the good is both excludable and subject to rivalry, it is called a private good, which are well allocated by the free market. If the good is excludable, yet not subject to rivalry it is called a club good, like cable television. If the good is non-excludable but subject to rivalry, it is called a common resource. They normally need to be regulated, since if not, will be overused and eventually disappear. If the good is neither excludable nor subject to rivalry it is referred to as a public good. The free market does not really work for them because of free riding, meaning that people can use them without paying. Therefore the government performs a cost benefit analysis on whether the benefit of the good is larger than its cost and, if so, provides it from tax revenue for everyone.
11.1. Public Goods
Goods differ in rivalry and excludability; public goods have none of these features.
In order to discuss public goods, which are the topic of this chapter, we must first define what differentiates them from other types of goods. So goods are classified along two dimensions: excludability and rivalry. To be more precise: is it possible to exclude someone from consuming the good an is there enough of the good of the same quality for everyone? If the good is both excludable and has rivalry in consumption it is a private good, like I can buy a cup of coffee exclude anyone else from drinking it and there isn’t enough for everyone sob there is rivalry. If the good is excludable but has no rivalry it is a club good like cable television, because a cable company can exclude people who do not buy the subscription from using it, but one consumer will not suffer any loss of quantity or quality if another joins the cable company. If the good is not excludable but subject to rivalry it is a common resource, like fish in the sea, because I cannot prevent someone from catching them, but the more someone fishes the less are left for me to catch. And lastly if the good is neither excludable nor subject to rivalry it is a public good like national defence, because if the whole country is protected then everyone in that country is protected.
As all non-excludable goods, public goods face the free rider problem where you cannot prevent someone from consuming the good even though he has not paid for it. For
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new mathematical theorem he could not place a patent on it, however if he discovers a new specific drug he is able to patent and profit from it. Therefor companies often do not spend enough on basic research and that is why the government tries to fund this kind of research in various universities and government research institutions. Also national defence is a probably the most popular example of a public good. A
government cannot choose which of its citizens to protect from a foreign aggressor, so all tax paying and not paying citizens will benefit from national defence. Fighting poverty can also be explained as a public good, because everyone will benefit in a society that has low levels of poverty from reduced crime rates to simply the fact that there is little suffering in the society one lives in.
Example:
When determining whether a good is a public good it is important to correctly identify the beneficiary of that good. For example, are lighthouses public goods? Every captain of every ship can see the light and by seeing it not reduce its quality to other captains, therefore if the ships are the main beneficiaries then lighthouses are public goods and that is why today governments mainly operate them. However in 19th century in England they were private property. The owners of ports used to pay for lighthouses, because if they would not, the light would be turned off and ships would avoid those ports. In this case the lighthouse is not a public, but a private good.
11.2. Common Resources
Common resources have to be regulated in order not to be depleted.
The closest to public goods come the commons, which are also non excludable yet they lose quality when used. A popular story in economics is that of the tragedy of the commons. Imagine an entire village, which has large fields of grass and survives on a wool industry. All the sheep can graze in the fields and everyone is happy for a while until the sheep population grows and therefore the grass grows less and less and eventually the land cannot sustain all the sheep, which starve and die and the villages industry disappears. The shepherds did not take care of the fields or control the sheep population growth because they were trying to maximize their own profit and an externality arose. If they would have aced together his problem could have been
avoided. In 17th century giving each shepherd family their own little piece of land to use and take care of solved this problem in England. Governments try to solve the problem of the tragedy of the commons by various regulations for example imposing tolls to reduce road congestion.
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