Public Goods

Two important characteristics of

goods and services
• Rival or Non-rival in consumption
• A good is non-rival in consumption if consumption by
one individual does not deprive another individual of
this good.
• Excludable or Non-Excludable
• A good is non-excludable if once they are produced and
made available, people cannot be excluded from using
them.
• These characteristics matter in determining how these
goods are supplied.
 The grid
Excludability
Rivalry in High Low
Consumption
High Private Goods Common Resources
Low Club Goods Public Goods

Excludability is usually not binary – the same good can be more or less excludable depending on technology
and policies

Hence the difference between public goods and club goods is contingent on many factors. What’s common
between them is that they are both non-rival.
Public Goods (national level/global)
– nonrival and non-excludable
• National Defense
• Air Quality
• Knowledge
• Radio/TV broadcasting
• Disaster protection: flood warnings, building codes for
earthquakes
• Global Climate
• International flight navigation
• Safety of shipping lanes
Non-rival goods
• The common characteristic of public goods and club
goods is non-rivalry in consumption.
• Whether the good is excludable or not depends on
feasibility (infeasible for national defense) and on
policies.
• A digital good (book/software) is non-rival. It is a public
good if it is free open-access but is a club good if it is
offered for a fee.
Public goods: local level
• Street lighting
• Crime prevention
• Public parks (non-rival unless it is highly congested; it
can, however, be excludable if there is an entry ticket)
• A lake or a community pond (subject to the same
caveat as above)
Club goods (non-rival up to the point
of congestion)
• Wi-fi
• Cable TV or Streaming
• Playground
• Cinemas
• Online courses
Non-rivalry and market efficiency
• Consider first the case of non-excludable public goods.
• Can a private producer charge a price for a public good?
• The market will not supply public goods.
• A public good would therefore have to be supplied by
the government or a private philanthrophy.
• The production of a public good costs resources.
• The government taxes people and uses that to provide
public goods.
• A private supplies uses resources from philanthrophy.
Government efficiency
• Does the government supply public goods efficiently?
• Unlike private firms, there are no competitive pressures
on government.
• [Link]
ption-what-do-we-know/
• Who are the watch dogs? Parliament, Auditing and anti-
corruption agencies, whistle blowers, Media
Local public goods
• Often their supply is related to political pressure and
lobbying by potential beneficiaries.
• Such collective action is itself a public good.
Collective action
• Private individuals come together for collective action
• E.g., a village needs a road, a primary health centre, a bus
service, sanitation services etc
• The outcome benefits everybody in the village – it is non-
rival and non-excludable.
• However, collective action is costly. It requires funds if the
villagers are to do it themselves.
• It requires resources (funds and time) if the villagers are to
lobby the government
• Suppose benefits >> costs. Will collective action happen?
The free rider problem
• This comes in the way of effective collective action
especially when groups are large.
E.g., collective action in irrigation
• Suppose there are four farmers. If any of them invests
$10 in the maintenance of irrigation system, everybody
benefits to the extent of $8.
• Will they invest?
 When other farmers contribute to the irrigation project
Cost Benefits Net gain
Farmer A contributes $10 $32 $22
Farmer A is a free rider 0 $24 $24

When one of the other farmers is also a free rider

Cost Benefits Net gain
Farmer A contributes $10 $24 $14
Farmer A is a free rider 0 $16 $16

When two of ther farmers are free riders Cost Benefits Net gain
Farmer A contributes $10 $16 $6
Farmer A is a free rider 0 $8 $8

When all the other farmers are free riders Cost Benefits Net gain
Farmer A contributes $10 $8 -$2
Farmer A is a free rider 0 0 0

espective of whether other farmers decide to contribute to the irrigation project or not, if farmer A were to
uided by self interest alone, the best policy would be to be a free rider.

all thought similarly, the best policy for each of them would be to be a free rider.

ence the outcome would be that nobody invests in the irrigation project.
Is this a realistic outcome?
• What happens in the real world?
• People may be selfish
• In small groups, people may care about others – altruistic
preferences and not think only in terms of self-interest.
• In small groups, even self-interested people may care about
group harmony more.
• The implicit threat of punishment by others may reduce free-
riding.
• In large groups, altruistic preferences weaken. If punishment
threats are weak, free riding may be rampant and public good
provision will be weak.
Club goods
• These are non-rival but excludable.
• Hence private firms may find it profitable to supply and
charge a price to exclude non-payers.
• That may not be an efficient outcome, however.
• Why?
E.g., a bridge across a river
• Cost of bridge: costs of construction = C
• The government grants a right to a private firm to charge a fee
to use the bridge (to recover the costs of building the bridge).
• Suppose the fee is Rs. 70 per crossing.
• All users who perceive benefits > 70 will pay the fee and cross
the bridge. Suppose the bridge is lightly used at this price.
• Users with positive benefits < 70 will not use the bridge.
• Benefits of bridge: Benefits to users who can pay Rs. 70 = B 1
• Net social gains when bridge use is excluded = B1 – C
Suppose bridge use is not
excludable
• Cost of bridge: costs of construction = C
• Benefits of bridge to all users = B2
• When bridge is available to all, total social gains = B2 –
C > B1 – C
• It is then efficient to allow everybody to use the bridge.
• The key to this result is the cost per additional user is
zero because the good is non-rival.
• Hence the result.
Trade-offs in policy
• The ideal policy that would achieve the efficient outcome is for the
private firm to charge a much lower price at which the bridge is fully
utilized. That lower price could be Rs. 0.
• The efficient outcome would therefore be less excluding and possibly
not excluding at all.
• But at that price, the private firm would not recover the costs of the
firm and would not build it all.
• And if the government does not have the money to compensate the
firm, then the best policy may be to allow the firm to charge a price so
that the bridge is built.
• For this reason, such pricing is regulated by the government to
maximize social benefits.
• This logic applies to all club goods.
Conclusions
• Non-rivalry makes market provision either infeasible or
inefficient.
• For non-excludable public goods, market provision is
infeasible.
• Governments have to provide it. Capable governments
that are accountable will do a good job.
• For excludable public goods, i.e., club goods, market
provision is feasible but is likely to be inefficient.
• Government subsidy is warranted for club goods that
have high potential benefits for the excluded
population.