![]() When individuals make decisions about buying a public good, a free rider problem can arise, in which people have an incentive to let others pay for the public good and then to “free ride” on the purchases of others. ![]() Visit this website to read about a connection between free riders and “bad music.” 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? Private companies find it difficult to produce public goods. Patents can also be described as an attempt to make new inventions into private goods, which are excludable and rivalrous, so that no one but the inventor is allowed to use them during the length of the patent. Private companies can invest in new inventions such as the Apple iPad and reap profits that may not capture all of the social benefits. Investments in education have huge positive spillovers but can be provided by a private company. Not all goods and services with positive externalities, however, are public goods. Public goods have positive externalities, like police protection or public health funding. Positive externalities and public goods are closely related concepts. Protecting some necessarily means protecting others, too. For instance, it would not be easy to provide fire and police service so that some people in a neighborhood would be protected from the burning and burglary of their property, while others would not be protected at all. With a public good like national defense, Max’s consumption of national defense does not reduce the amount left for Michelle, so they are nonrivalrous in this area.Ī number of government services are examples of public goods. With a private good like pizza, if Max is eating the pizza then Michelle cannot also eat it that is, the two people are rivals in consumption. The second main characteristic of a public good, that it is nonrivalrous, means that when one person uses the public good, another can also use it. You cannot choose to be unprotected, and national defense cannot protect everyone else and exclude you. Even if you strongly disagree with America’s defense policies or with the level of defense spending, the national defense still protects you. However, if national defense is being provided, then it includes everyone. If Larry buys a private good like a piece of pizza, then he can exclude others, like Lorna, from eating that pizza. The first characteristic, that a public good is nonexcludable, means that it is costly or impossible to exclude someone from using the good. ![]() Instead, public goods have two defining characteristics: they are nonexcludable and nonrivalrous. However, public goods are not separate and identifiable in this way. A piece of pizza can be bought and sold fairly easily because it is a separate and identifiable item. To understand the defining characteristics of a public good, first consider an ordinary private good, like a piece of pizza. ![]() The Definition of a Public GoodĮconomists have a strict definition of a public good, and it does not necessarily include all goods financed through taxes. Then we will see how government may step in to address the issue. Let’s begin by defining the characteristics of a public good and discussing why these characteristics make it difficult for private firms to supply public goods. Spending on national defense is a good example of a public good. What about a situation where the positive externalities are so extensive that private firms could not expect to receive any of the social benefit? This kind of good is called a public good.
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