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Public Goods ARGON LERT PublicJ GoodsA BY TIM SABLIK n the centuries before radar and GPS, lighthouses individuals. These individuals raised money for the light- guided ships safely through dangerous waters. Today, houses by collecting a fee from ship captains at ports. This is Ithey exist mostly as relics of the past, providing scenic an example of what economists would later call “tying”; backdrops for postcards and photos. But lighthouses have that is, lighthouse owners were able to tie the use of the also fulfilled an important role in economics textbooks: public good (the lighthouse) with the use of another good illuminating the concept of public goods. for which private property rights are assigned (the port). There are two qualities that set public goods apart from Any captain who refused to pay for the lighthouses could other goods. They are “nonrival,” meaning their use or con- easily be excluded from the port. Lighthouses in England sumption by one party does not inhibit their use or continue to be funded the same way today. consumption by another, and they are “nonexcludable,” Changes in technology can also make it viable to meaning that it is impossible (or too costly) to prevent any privately provide goods that once seemed nonexcludable. consumers from using them. In the case of lighthouses, When TV debuted, it was seen as a public good. Anyone one ship captain can make use of the light to avoid with a receiver in range of the signal could enjoy the broad- danger without inhibiting other captains from doing the cast, making it impossible to charge for TV and exclude same. Additionally, once a light- those who refused to pay. house is constructed, it is But as technology improved, impossible to block any ship on private cable companies were the water from using its light. able to exclude nonpayers Other textbook examples of by requiring proprietary cable public goods include fireworks boxes to descramble their displays, national defense, and signal. environmental quality. Not all economists agree Nonexcludability can create that public goods should be a “free rider” problem. Imagine provided privately even if it is there is an entrepreneur who feasible to do so, however. wants to build a new lighthouse. Because such goods are also He knows the lighthouse provides a valuable service to ship nonrival, it is in theory costless to provide them to any num- captains, and he asks each captain to contribute to its ber of consumers. In the case of TV broadcasts, Samuelson construction. The captains want to see the lighthouse built, argued that it was not in the best interest of society to but they also know they can enjoy the benefits of the exclude any individuals from watching programs, since completed lighthouse whether or not they paid for it. This doing so would only diminish society’s overall happiness. means they can choose to contribute nothing and hope to But other economists countered that providing public “free ride” on the generosity of others. But if enough of the goods always entails costs. Economist Jora Minasian argued captains think this way, then the entrepreneur will not raise in a 1964 article that TV broadcasters must determine sufficient funds, and the lighthouse won’t be built. This has which programs to provide with finite resources. Making led many economists to conclude that public goods repre- that choice efficiently requires some sort of market pricing sent a form of market failure that the government can system to determine the programs that will generate the correct by providing them through tax revenue. most utility for viewers. Minasian concluded that “the Paul Samuelson, who provided the modern economics theory of public goods is of little help in distinguishing definition of public goods in a 1954 article, wrote in his those goods that are best provided via community action seminal textbook: “A businessman could not build [a light- from those that should be left to individual decisions and house] for a profit, since he cannot claim a price from each preferences.” user. This certainly is the kind of activity that governments Research conducted by Coase, Minasian, and many would naturally undertake.” others during the 1960s and 1970s revealed that there were But in the decades that followed, economists began to in fact fewer examples of truly public goods than economists challenge the assumption that public goods could only be initially thought. Rather, the public or private provision of provided by the public sector. In a 1974 paper, Ronald Coase any good involves costs and benefits, and it may not always OOK investigated the history of lighthouses in England. He be immediately clear which solution results in the best THY C discovered that, contrary to common assumption, many of outcome. Additionally, those tradeoffs can change over time TION: TIMO the lighthouses had been built and maintained by private as technology improves. EF TRA ILLUS 10 E CON F OCUS | FOURTH Q UARTER | 2013.
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