Public Goods and Externalities

Sometimes in a free market economy, which we defined earlier in the series as one that

is based on supply and demand rather than any kind of government control,

we need the government to provide certain goods and services that the marketplace cannot.

Take this publicly accessible bridge, for example. This bridge is a public good, or a shared good,

Public/Shared Good

and it doesn’t make sense to force consumers to pay individually to use the bridge,

or to somehow prohibit those who didn’t pay from using the bridge. The bridge is for everyone,

and actually, it helps the overall economy. So how is the bridge paid for? Well, to simplify

the funding of government projects in the public interest, the government collects taxes. Citizens

of a society pay taxes to a government, and that government in turn takes some of that money to

build and maintain that bridge. Imagine the arguments and traffic congestion that would occur

if drivers who refused to pay to use the bridge were told they had to turn around and drive away.

With this bridge, as with most public goods, it is impractical to exclude nonpayers from its use.

Another characteristic that makes this bridge a public good is that any number of consumers can

use it without reducing the benefits to any one person using it. For the most part, increasing

the number of drivers on the bridge does not increase the cost of providing the bridge.

Public goods are paid for by what is known as the public sector.

Every other part of the economy is paid for by the private sector. The most common public goods

make up a nation’s infrastructure, or the basic facilities that are necessary for a society and

Infrastructure the basic structures and facilities needed for a country to operate

economy to function and grow efficiently. What should or shouldn’t be a public good

often leads to political debate. After all, whenever tax dollars are involved,

taxpayers generally want to see those tax dollars align with their own values and beliefs.

Generally, the following questions guide the debate about whether or not something should

be classified as a “public good”. Number one. Is the benefit to each individual greater if the good

1. Is the individual benefit greater if the good remains private?

remains private? Number two. Is the benefit to society greater if the good becomes public?

Take education, for example. To answer the first question, if education were exclusively private,

it’s possible that it would be run more efficiently, and many individuals might be

better off. But to answer the second question, it is important for any society to have an educated

populace, and the easiest way to achieve this is to guarantee a basic education for everyone,

so in a grander context it makes sense for education to be a public good.

One issue associated with public goods is called the “free-rider problem.” A free rider is someone

who is not willing to pay for a certain good or service, but still gets the benefit if it were

Free-Rider Problem

provided as a public good. Unlike consumers in a pure free market, free riders consume what they

don’t directly pay for. However, the free-rider problem is inevitable. For example, you likely

wouldn’t voluntarily pay money to build highways in a state you don’t live in. However, you could

still benefit from that state building a highway, as that highway would make it easier for trucking