Economics Terms A-Z
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There are many different ways that economists classify the different types of goods and services sold in the economy. The characteristics of goods – for instance, whether they are rivalrous or excludable – help economists classify goods into one of four categories. These are club goods, private goods, public goods, and common resources.
Public goods in economics are goods that are both non-excludable and non-rivalrous. These characteristics of public goods mean that if one person uses the good, it does not reduce others’ potential enjoyment of the good, and further that people cannot be prevented from accessing the good.
It’s easiest to illustrate the concept by using an example. A lighthouse provides a service that’s considered a public good. Lighthouses help guide ships by providing a signal that land is nearby, and warn against potential dangers in the water.
The signal sent by lighthouses cannot be given to some ships but prevented from reaching others – it simply gets emitted. This makes the service non-excludable. Similarly, the signal put out by a lighthouse doesn’t diminish in usefulness as more ships receive it. Thus, a lighthouse’s service is also non-rival.
Another example of a public good is the air we breathe. People can’t be stopped from using air, nor does breathing limit someone else’s ability to breathe. Yet more examples of public goods are disease prevention and national defense. Both of these services benefit everyone, and when one person benefits from them, others aren’t prevented from benefitting either.
Because they are both non-excludable and non-rival, public goods are often subject to the free rider problem in economics. This problem arises when people can freely access a good or service, and as such are not incentivized to help pay for it or maintain it – in other words, they “free ride”.
Free riders benefit from the work of others at no cost to themselves, and they refuse to pay if they have a choice. Because of this behavior, public goods that aren’t naturally occurring (like breathable air) are often provided by a government via taxation, as the private market will almost always under-provide them.
In fact, public goods usually have large positive externalities, for instance: national defense makes everyone safer, parks improve neighborhoods (note these can also be classified as a common resource; more on that in the Good to Know section), disease prevention improves public health, etc. Goods with positive externalities are usually under-provided by the market, which is one form of market failure. The government usually taxes the citizenry to provide these services themselves and mitigate that market failure, improving society’s overall welfare.
Therefore, public goods are typically either provided by a government, or are naturally occurring. The non-rival and non-excludable nature of public goods make them virtually impossible to sell for a profit.
However, radio programs are one example of a public good that have been provided privately by companies operating in a market – although even this required some regulation to allow the market to operate. Radio stations buy the right to use specific radio frequencies from the relevant authority (usually a governmental body) and are then allowed to broadcast their signal via radio waves.
Radio is a public good. Radio waves are freely available for any citizen with a radio to tune in to, and listening to the radio program does not prevent others from doing so. Further, anyone with a radio can’t be stopped from listening to any radio station.
So, how do radio stations make money? Advertising; advertisers seeking new audiences support the radio station by purchasing time on the station’s program. Of course, this means that the cost for radio listeners isn’t entirely free after all: they must pay the cost of their time listening to ads instead of their favorite program when they use their radio.
Good to Know
Certain public goods, due to their non-excludable nature, are subject to the Tragedy of the Commons problem. Although air is non-excludable and non-rival, it can be degraded by pollution. Indeed, this degradation – in other words, air becoming less enjoyable as others pollute it – is characteristic of a common resource.
Economists will often classify air as both a public good and a common resource, depending on the context. If air is plentiful, and the analysis is limited to a specific area where pollution is not a concern, then fresh air exhibits qualities of a public good. Otherwise, especially if pollution is a concern, fresh air is better classified as a common resource.
This example shows how the line between public goods and common resources can be blurred sometimes. Examples of pure public goods that are always fully non-excludable and fully non-rival are hard to come by, but the categorization is still quite useful for economic analysis.
- Economics Terms A-Z
Money and the Money Supply