Even though new technology creates positive externalities so that perhaps one-third or one-half of the social benefit of new inventions spills over to others, the inventor still receives some private return.
What about a situation where the positive externalities are so extensive that private firms could not expect to receive any of the social benefits?
We call this kind of good a public good. Spending on national defence is a good example of a public good. Let’s begin by defining the characteristics of public goods and discussing why these characteristics make it difficult for private firms to supply public goods. Then we will see how the government may step in to address the issue.
Economists have a strict definition of a public good, and it does not necessarily include all goods financed through taxes. To understand the defining characteristics of a public good, first consider an ordinary private good, like a piece of pizza. We can buy and sell a piece of pizza fairly easily because it is a separate and identifiable item. However, public goods are not separate and identifiable in this way.
Instead, public goods have two defining characteristics: they are nonexcludable and non-rival.
- The first characteristic, that a public good is non-excludable, means that it is costly or impossible to exclude someone from using the good. If Larry buys a private good like a piece of pizza, then he can exclude others, like Lorna, from eating that pizza. However, if the national defence is provided, then it includes everyone. Even if you strongly disagree with Canada’s defence policies or with the level of defence spending, the national defence still protects you. You cannot choose to be unprotected, and national defence cannot protect everyone else and exclude you.
- The second main characteristic of a public good, that it is non-rival, means that when one person uses the public good, another can also use it. With a private good like pizza, if Max is eating the pizza then Amy cannot also eat it; that is, the two people are rivals in consumption. With a public good like national defence, Max’s consumption of national defence does not reduce the amount left for Michelle, so they are non-rival in this area.
A number of government services are examples of public goods. For instance, it would not be easy to provide fire and police service so that some people in a neighbourhood would be protected from the burning and burglary of their property, while others would not be protected at all. Protecting some necessarily means protecting others, too. Private Goods are both rival and excludable while public goods are both non-excludable and non-rival.
The Free Rider Problem of Public Goods
Private companies find it difficult to produce public goods. 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.
“13.3 Public Goods” in Principles of Economics 2e by OpenStax is licensed under Creative Commons Attribution 4.0 International License.