Public Finance (DSE 5.
1T)
Unit-1: Origin & Development of Public Finance
Public Good
Lecture-4
In economics, a public good refers to a commodity or service that is made available to all
members of a society. Typically, these services are administered by governments and paid for
collectively through taxation.
Examples of public goods include law enforcement, national defense, and the rule of law.
Public goods also refer to more basic goods, such as access to clean air and drinking water.
Key Features:
Public goods are commodities or services that benefit all members of society, and
which are often provided for free through public taxation.
Public goods are the opposite of private goods, which are inherently scarce and are
paid for separately by individuals.
Societies will disagree about which goods should be considered public goods; these
differences are often reflected in nations’ government spending priorities.
How Public Goods Work
The two main criteria that distinguish a public good are that it must be non-rivalrous and non-
excludable. Non-rivalrous means that the goods do not dwindle in supply as more people
consume them; non-excludability means that the good is available to all citizens.
An important issue that is related to public goods is referred to as the free rider problem.
Since public goods are made available to all people–regardless of whether each person
individually pays for them–it is possible for some members of society to use the good despite
refusing to pay for it. People who do not pay taxes, for example, are essentially taking a "free
ride" on revenues provided by those who do pay them, as do turnstile jumpers on a subway
system.
Free rider problem
The problem with public goods is that they have a free-rider problem. This means that it is
not possible to prevent anyone from enjoying a good, once it has been provided. Therefore
there is no incentive for people to pay for the good because they can consume it without
paying for it.
However, this will lead to there being no good being provided.
Therefore there will be social inefficiency.
Therefore there will be a need for the govt to provide it directly out of general
taxation.
The opposite of a public good is a private good, which is both excludable and rivalrous.
These goods can only be used by one person at a time–for example, a wedding ring. In some
cases, they may even be destroyed in the act of using them, such as when a slice of pizza is
eaten. Private goods generally cost money, and this amount pays for its private use. Most of
the goods and services that we consume or make use of in our everyday lives are private
goods. Although they are not subject to the free-rider problem, they are also not available to
everyone, since not everyone can afford to purchase them.
In some cases, public goods are not fully non-rival and non-excludable. For example, the post
office can be seen as a public good, since it is used by a large portion of the population and is
financed by taxpayers. However, unlike the air we breathe, using the post office does require
some nominal costs, such as paying for postage. Similarly, some goods are described as
“quasi-public” goods because, although they are made available to all, their value can
diminish as more people use them. For example, a country’s road system may be available to
all its citizens, but the value of those roads declines when they become congested during rush
hour.
Example of Public Goods
Individual countries will reach different decisions as to which goods and services should be
considered public goods, and this is often reflected in their national budgets. For example,
many argue that national defense is an important public good because the security of the
nation benefits all its citizens. To that end, many countries invest heavily in their militaries,
financing army upkeep, weapons purchases, and research and development (R&D) through
public taxation. In the United States, for example, the total expenditures of the Department of
Defense (DOD) were nearly $700 billion in 2019.
Some countries also treat social services–such as health care and public education–as a type
of public good. For example, some countries, including Canada, Mexico, the United
Kingdom, France, Germany, Italy, Israel, and China, provide taxpayer-funded healthcare to
their citizens. Similarly, government investments in public education have grown
tremendously in recent decades. According to estimates by Our World in Data, the share of
the world population that has benefited from formal education grew from roughly 50% to
over 80% between 1950 and 2010.
Advocates for this kind of government spending on public goods argue that its economic and
social benefits significantly outweigh its costs, pointing to outcomes such as improved
workforce participation, higher-skilled domestic industries, and reduced rates of poverty over
the medium to long-term. Critics of this kind of spending argue that it can pose a burden on
taxpayers and that the goods in question can be more efficiently provided through the private
sector.
Quasi-Public Goods
These are goods which have an element of non-excludability and non-rivalry. Roads are a
good example. Once provided most people can use them, for example, those who have a
driving licence. However, when you use a road, the amount others can benefit is reduced to
some extent, because there will be increased congestion.
Market provision of public goods
Although classical economic theory suggests public goods will not be provided by a free
market, there are cases when groups of individuals can come together to voluntarily provide
public goods.
Behavioural economics suggests that individuals can have motivations other than just money.
People may volunteer to contribute to local flood defences out of a sense of civic pride, peer
pressure or genuine altruism. Therefore, in the real world, enough people may contribute to
paying for a public good, even if – from a narrow self-interest point of view – it may be
rational to avoid paying.
