Public Goods

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Public Goods

Public goods such as law enforcement, national defense, highways, and environmental regulation are typically provided by governments rather than the private sector, although this is not a requirement. Governments provide these because public goods share two properties that make their provision by private firms difficult. The first is that there is no rivalry in their consumption: Use of a public good by one individual does not decrease its value to others. The second is that the benefits are freely accessible to all, so no individual can be excluded from the use of these goods.

The first condition implies that financing production by charging a price for access to the good would inefficiently restrict access to the good. The second condition of non-excludability implies that charging a price is also infeasible from a practical standpoint (Figure 1). As a result, private firms will generally have little incentive to produce public goods: Provision requires collective action among those parties desiring the good (Olson 1965). Insufficient financing for production is likely to result from voluntary contributions, however, since individuals need not pay a price to enjoy an open-access public good. This has been called the free-rider problem. As a result, provision of public goods generally falls to governments, which have the coercive power necessary to levy the taxes required to pay for the goods.

A difficulty arises, however, in establishing both equity and the preferred level of a public good. To provide the sufficient level of a public good, governments must know how much individuals benefit from it. Optimally, an individual’s tax assessment would then reflect his or her own valuation of the public good. In practice, however, when individuals know they cannot be denied access to

the good and will be assessed taxes in proportion to their announced valuation, they have no incentive to reveal their true preferences (the free-rider problem again). Economists have studied various means by which governments can induce individuals to provide information about their preferences. The key to these revelation mechanisms is that the taxes levied on the individual to finance the good must be set independently of their announced valuation.

This fact, combined with the fixed costs of designing a tax system, provides one explanation for the observation that countries typically organize so that a single government provides multiple public goods, rather than having a system of overlapping jurisdictions each responsible for a single public good. Not all public goods are most efficiently provided by a single centralized authority, however, and a hierarchy of jurisdictions and subjurisdictions may exist for providing public goods. One example is the U.S. system of federal, state, and local governments, in which the federal government provides military defense, regulates commerce, and designs social welfare programs to achieve equity goals, while state governments set regulations on social behavior and local governments provide a range of services from education to street cleaning. Another example is the hierarchy between public goods provided within sovereign nation-states and global public goods that must be provided through collective action among a group of nation-states, such as peacekeeping, international regulation of civil aviation and commerce, exchange rate management, and efforts to combat global warming.

Analytically, the key distinction between global, national, and state or local public goods rests on two dimensions: the sovereignty of the nation-state and the mobility of the citizenry. The free-rider problem can be overcome in providing public goods at the level of the nation-state and its subjurisdictions through the coercive power of governments to enforce tax and regulatory policies, but no similar mechanism exists for the provision of global public goods. Similarly, within the nation-state, citizens are typically free to live in the subjurisdiction that offers their preferred combination of public-good provision and tax burden. As a result, efficient provision can be achieved by citizens “voting with their feet” (Tiebout 1956). Migration between nation-states is more difficult, however, and between planets impossible, so the political process by which national and global public goods are determined is crucial.

Ideally, responsibility for public goods should be allocated among the hierarchy of governments using several criteria: (1) the extent of nonrivalry (including both the proportion of fixed costs relative to variable costs and the geographic scope of the benefits); (2) the uniformity of

opinion regarding the preferred nature of the public good; and (3) problems of adverse selection. Public goods that entail relatively high fixed costs and have widespread benefits, such as maintaining peace and security through law enforcement and the military, or maintaining clean air and water and a stable climate through environmental protection, should optimally be provided at a centralized level (Figure 2). Where preferences over the size, quality, or nature of the public good vary widely, however, more decentralized provision may be preferable. This is particularly true for goods that have more limited geographic benefits, and thus a higher degree of rivalry, such as public education and community social activities. Wallace Oates (1972) argues further that policies designed to achieve distributional equity goals are also best provided at a federal level to avoid the adverse budgetary effects that might arise with poorer families selecting to live in, and richer families selecting to live outside of, those state and local jurisdictions with more progressive policies.

It is worth noting that not all publicly provided goods are pure public goods by the conventional definition employed in this entry. Information, for instance, is non-rival in consumption but certainly potentially excludable. Legal rights and the rule of law are potentially excludable as well, as history has demonstrated to many disenfranchised communities. Common property resources like fish, on the other hand, are nonexcludable, but their consumption is rival. In each case government regulation of the provision process—whether through patent law, civil rights legislation, or fishery management—can in principle be desirable. In weak and failed states, however, regulation of resources may generate incentives for corruption, as officials “sell” licenses and grant access for personal profit. In other cases, governments have opted to provide private goods, such as education, health care, or postal services, all of which are both rival and excludable, in order to capitalize on fixed costs, achieve beneficial externalities, or to adopt certain standards (the benefits of which are both nonrival and nonexcludable).

SEE ALSO Collective Action; Institutionalism