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Section 3 Providing Public Goods

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Objectives

After studying this section you will be able to:

1. Identify examples of public goods.
2. Analyze market failures.
3. Evaluate how the government allocates some resources by managing externalities.

Section Focus

The government sometimes steps in to provide a shared good or resource when it would be impractical for consumers to pay individually.

Key Terms

• public good
• public sector
• private sector
• free rider
• market failure
• externality

What if the government decided to leave the business of road-building up to private citizens? If you wanted a road in front of your house, you'd have to pay a contractor to build it. Or more likely, you and your neighbors could chip in and hire someone to build you a small network of streets.

What problems might arise in this scenario? For one thing, if groups of individuals pooled their money to build a road or a freeway, who would they allow to use it? Would drivers have to constantly stop and pay the owners of each road they drove on? How would individuals living in sparsely populated areas come up with enough money to build the roads they needed?

Public Goods

Roads are one of many examples in which the government provides a public good, a shared good or service for which it would be inefficient or impractical (1) to make consumers pay individually and (2) to exclude nonpayers. Dams are another example of public goods.

Let's look at the first feature, making consumers pay individually: How would you like to receive a bill in your mailbox for your share of launching a space shuttle or cleaning Mount Rushmore? To simplify the funding of government projects in the public interest, the government collects taxes.

What about the second feature of a public good, excluding nonpayers? As a society, we believe that certain facilities or services should be available to all. Besides, excluding nonpayers from highways would be a nightmare.

Most goods are public simply because a private provider could not charge those who benefit or exclude nonpayers from benefiting. For example, in 1872, Congress created the nation's first national park, Yellowstone. The national park system ensured that the natural resources Americans value would be protected.

If a park were privately owned, the owner could charge an admission fee. Yet some benefits generated by the park, such as the preservation of wildlife, would be enjoyed by nonpayers as well as payers. The owner could neither charge people for that public benefit nor exclude them from it.

Public goods have other characteristics: Any number of consumers can use them without reducing the benefits to any single consumer. For the most part, increasing the number of consumers does not increase the cost of providing the public good. So if you're driving on a highway and eight other drivers come along, they do not significantly reduce the road's benefits to you or increase the government's cost of providing it.

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