Public goods are products (goods and services) whose production or consumption is inherently collective in nature.

Private goods are products with properties that are wholly controllable by their lawful owners.

While an individual can produce products with the characteristics of public goods, it is only the government that produces public goods.

The notion of public in public goods refers to the legal authority to act on behalf of the common good.

Public bads are products with the same characteristics as public goods but their effects are negative for society.

Pollution, the supply of rotten foods to the public, the threat from nuclear weapons are classic examples of public bads.

So the term public goods is a generic name that include public goods, public services as well as the control and elimination of public bads or those products that negatively affect the general welfare.

Public goods do not ascribe to the laws of market exchange. Because of their peculiar characteristics, public goods do not give out incentives that will attract optimal market reaction.

Either they are so lucrative to produce, they attract too many producers leading to overproduction, or they are not sufficiently lucrative to produce, they are under-supplied in terms of society’s ideal needs.

Government action to ensure the optimal production of public goods and so secure the collective good is what is good about public goods.

Public goods produced by government for the exclusive benefit of its citizens are called domestic public goods.

Products with public goods characteristics that are of interest to, or that have effects on, the people of more than one country are called global collective goods.

Global collective goods cannot be considered as public goods because the notion of public in public goods connotes government authority to act on behalf of the common good.

And yet there is, nor can there be governance at the global level, the main problematic for international relations.

Nation states, the principal actors at the global level, enjoy sovereignty or absolute power and so cannot recognize nor submit to any power above them.

International organizations like the United Nations, are only as effective as their member nation-states are willing to give it power over them.

Government intervention in the private market to produce public goods is the least controversial of government interventions in the private market.

Yet still, public goods draw a lot of controversy over what goods and services qualify as public goods.

Increasingly as more and more products are brought under the public sector as public goods, the scope of government or the public sector has expanded.

In the US, the public sector has grown from around 25% of the GDP in the early 1920s to around 35% by the 1990s.

But the size of the public sector per se is not the issue.

Nor do government critics doubt the fact that government may at time employ the same cost-efficient standards in its programs that the market is known for.

Yet it remains a fact that a large portion of government decisions are still made for purely political reasons that would not stand the test of economic efficiency.

Those who are critical of the expanding scope of government are worried that as an increasing scope of the GDP is ordered by and/or on behalf of government, it means a large chunk of the economy may not be submitted to the competitive efficiency standards of the marketplace.

Their solution is to reduce the overall scope of the public sector.

They are therefore alarmed at the least suggestion that certain private sector products like healthcare be shifted to the public domain.

Today the US remains the only industrial country to hold on to the tradition of private health care excluding Medicaid and Medicare.

However, maximum waste reduction has never been the sole criterion why government allocates resources, another legitimate political motivation is pure political gain.

To end much of the controversy over which products qualify as public goods, we should apply the public goods test, whether or not a particular products exhibit certain peculiar characteristics found exclusively in public goods.

Products with significant amounts of these properties are public goods and fall within the purview of government.

Products without significant amounts of these properties are private goods and fall within the purview of the private market.

Public goods are characterized by nondivisibility, nonexclusion.

A product is said to be indivisible if the consumption of one unit of that product does not diminish the quality nor quantity available for others.

Jointness of supply means that if new members are added to the group, the other members of the group would not received a diminished amount of the product.

An apple has separable parts, but a lighthouse, a road, an airport, defense, clean air, and the preventing of contagious diseases have joint units.

Products are said to be nonexclusive if their lawful owners cannot enjoy them unless they allow equal quality and quantity consumption to noncontributors.

Products and services that have high levels of nondivisibility and nonexclusion are likely to have lots of externalities.

Externality is an unintended result of production or consumption. An externality exists if the production or consumption of a product yields benefits to or imposes costs on unintended third parties.

Combining all three, we can determine if a product is a public or a private good.

An externality is the effect of an economic activity felt by those not directly involved in the economic activity.

David Ricardo, the first neoclassicist to break ranks with classical economists, believes that acts of consumption and production have effects on third parties.

Externalities can be both positive and negative, but, according to Ricardo, externalities are often more negative, and consequently, it is the negative externalities that capture our attention.

Positive externalities are often described as spillover effects to suggest their effects are felt by consumers who were not directly intended by their producers.

Market exchange presumes that traders have total control over every aspect of their product, that the prices and fees they charge represent the full cost of production plus profit, and that they can be held accountable through the payment of fines and other penalties for the damage caused by their products.

But the fact that their products may have positive externalities means that the fees producers charge for the use of their products do not reflect the full benefits their products deliver.

And the fact that negative externalities may exist means that producers and traders of product with extensive negative externalities are not fully accountable for all the cost of their production and sale, respectively.

There is a natural aversion to bear costs especially for negative externalities

Certain positive externalities are controllable through regulation.

Patents are established in law to give innovators of new products and technologies a temporary shelter from competition judged to be sufficiently long to enable innovators to recover their capital outlay.

Similarly, authors of books and artworks enjoy copy rights protection such that others may reproduce any part of their work only upon the explicit permission of these authors.

But most positive externalities are so pervasive, affecting everyone within their range, they cannot be effectively contained through regulation.

Where externalities are so positive and pervasive, government enters the market directly as an entrepreneur to produce them.

Examples include education whose positive effects are so far beyond its benefits to the individual, society at large derives extensive benefits from the individual’s education.

Therefore, governments all over the world find it necessary to provide public education at the elementary level and to subsidize even university education.

Private industry does not see a direct link between the unknown future externalities of generalized research and their own immediate bottom line.

So it falls on government to protect the futuristic technology interest of the society through the funding of generalized research.

A producer of a negative externality who does not have to worry about its full cost is likely to produce an excessive harmful amount of the product.

Regulations and fines may deter the production of negative externalities.

But the effects of regulation may be limited under these three conditions:

(b) where negative externalities are so pervasive their producers could never pay for their full cost, even if they are caught and charged;

The market itself has no mechanisms to protect property rights, the rights owners exercise over their lawful assets.

But having to borrow the protection of property rights from the political domain is not the only nor main problem.

Social production remains efficient only when all benefits and costs are paid for.

The property rights of products with extensive nondivisible and nonexclusive properties cannot be determined for sure.

Owners of such products cannot therefore exercise sufficient control over their assets as is required for trading.

Example: the owner of a well manicured lawn with roses cannot exercise sufficient control over his roses to charge neighbors a fee as a condition for their enjoyment of his own production.

Products whose property cannot be fully controlled to enable charging are in danger of being underproduced.

Producers are not particularly motivated to produce socially-optimal amount of products they cannot charge a fee for nor make profits from.

Free riders are people who do not take responsibility for the costs they impose on others and society.

Aversion to joint responsibility is motivated by a feeling that the consequences of one’s action are insignificant to group or society outcomes.

That social outcomes are determined not by the actions of the individual but by the actions of the majority.

The individual can excuse himself from contributing to joint costs on the assumption that the majority of others would contribute.

Because such free riders are not easily identified in large groups this type of free riding will be particularly severe if the number of people benefitting from the public good is very large.

The conditions and outcome of free riding motivated by an aversion to joint cost are:

a) an extensively nondivisible and nonexclusive public good;

b) a large number of beneficiaries;

c) compliance by the majority;

d) severe negative social outcome.

Question: Can you identify all four elements in the traffic light and the tragedy of the commons examples?

Free riding does not stem from outright malice nor hatred for others or society.

Many free riders are motivated by skepticism about society protecting their individual interest and hence the need for self protection in order not to be taken advantage of.

Lessons we can learn from the prisoners’ dilemma game:

We learn that the instinct of self-preservation is much stronger than the instinct for cooperation and working for the interest of others.

Because individual and societal payoffs clash, the likely payoff for society is DD.

So society organized on a purely voluntary basis such as the free market system would abound with free riding behavior.

This contradicts Adam Smith’s position that the invisible hand of the market would guarantee the social good.

The story also explains why UN embargoes often don’t work; some nation states hesitate to cooperate less others might defect making scape goats of them.

Given the production of public goods cannot be entrusted to individuals, it falls on government to produce them.

The separation of private from public goods is a matter of degree rather than a difference of kind.

That means some private and public goods have the properties of nondivisibility and nonexclusion in greater degree than others.

In between these two extremes are varying degrees of public goods as defined by certain theoretical distinctions.

Pure public goods have extremely nondivisible and nonexclusive properties, have extensive externalities and are therefore exposed to all the problems discussed above.

At the global level pure public goods are natural resources that do not belong to any specific country. e.g. outer space.

Impure public goods:

Impure public goods are partially divisible and exclusive. They can be produced and treated as private goods, but doing some would pose tremendous social problems for two reasons.

Significant Externalities. Impure public goods have significant externalities making it impossible to control their property rights.

Eg. City park admission fees do not come anywhere close to covering the full cost of benefits these parks deliver.

The problem can be seen as one of bulkiness, the externality benefits are so extensive, only social or collective consumption of such products is economically efficient.

The police, fire service, and garbage collective are examples of public goods with such extensive externalities, only the use of a limited number or amount of such products can be effective.

Limits-to-Growth Problems. Nonreplenishable goods like natural gas, forests, fresh water, animals and endangered species that may fall within the geographic borders of a state pose limits-to-growth problems affecting whole regions or even the whole world.

The lawful owners of such resources are not morally allowed to treat them as typical market commodities for sale to the highest bidder.

The peasant farmers of the Amazon forest, responsible for cleaning the air system over much of the Americas, are not morally allowed to destroy its forests by clear burning for agriculture.

Selfish national exploitation of natural resources with extensive cross-border externalities will only create more international tension.

But as the problems in the sharing of the water resources from Mount Sinai and the Golan Heights shows, interstate cooperation to exploit international resources is often complicated by other issues like the Arab Israeli conflict.

Essentials-to-life. Such products are close to being private goods, and could be produced on private basis.

As essentials to human survival, water and sewage, electricity, the scientific approval of drugs, security at airports, and medical care are just a few examples of services that can be used to hold society to ransom, or to make super profits as society’s expense.

At the global level, unequal access to global common pool resources constitutes exploitation of the poorer countries by the rich few countries with the capability to exploit these common pool resources.

It will likely increase the already wide gap between rich and poor countries.