The Theory of Public Goods

11

Public Goods 1.1 Public Goods and Private Goods

In Chap. 8, we investigated taxation from the viewpoint of efficiency. In this chapter, we investigate government spending from the viewpoint of efficiency. Here, the notion of public goods is important. As explained in Chap. 1, public goods have properties of non-rivalness and non-excludability. Non-rivalness in consumption means that an increase in someone’s consumption does not reduce the availability of consumption for others. Non-excludability means that someone cannot be excluded from consuming a good because of technical or other reasons simply because she or he does not pay the price.

Goods that are not perfectly excludable or rival are called impure public goods. Non-excludable and non-rival public goods may have different spillover effects among people. Impure public goods may be classified according to the degree of spillover.

For example, consider a streetlight. Imagine that a community has many people who need the benefit of streetlights. A streetlight could be set in front of a house in this community. The benefit of the streetlight may be indicated by the degree of brightness of its light. Let us denote by 1 the brightness in front of the house. The brightness for the houses of others may represent the degree of spillover. If this is zero, the streetlight does not provide spillover and is a private good. However, if it is unity, namely the spillover effect is the same as the original light and everyone can enjoy the benefit equally, it becomes a pure public good. If the brightness is between 0 and 1, namely the spillover effect is positive but smaller than the original effect, it becomes an impure public good. Both pure public goods and impure public goods are sometimes simply called public goods.

The government does not necessarily have to provide public goods. On the contrary, the private sector can provide certain types of public good. For example, education may be regarded as an impure public good with excludability but without

© Springer Science+Business Media Singapore 2017 295

T. Ihori, Principles of Public Finance, Springer Texts in Business and Economics,

DOI 10.1007/978-981-10-2389-7_11

Table 11.1 Public goods and private goods

Excludable

Non-excludable

Rival

Private good

Commons

Non-rival

Club good

Public good

rivalness that can be provided by the government or the private sector. In this context, non-excludability does not apply to education and non-rivalness applies to some extent. A school may determine who is allowed to attend it based on ability or other standards; however, many students can nonetheless enjoy education services. Further, defense is a typical example of a pure public good that benefits all people in a country. Even so, the provision of defense depends significantly on private defense firms. Indeed, the government is a buyer of this particular good.

Although it seems rare to satisfy the foregoing two definitions of non-rivalness and non-excludability perfectly, a wide range of goods approximately satisfy at least some aspects of the two definitions as impure public goods. Namely, if a good provides some externalities to others, it may be called a public good in accordance with a wider definition. In this regard, the positive externality of consumption is an important feature that can differentiate a public good from a private good.

Excludable but non-rival goods are called club goods. Private sports facilities may charge a membership fee and those who pay the fee are allowed to use the facility. Such a good is excludable but non-rival because someone’s use does not have a negative spillover effect on others. Many members may use the same facility without serious congestion as long as the number of students is appropriate. As explained in Chap. 13, some public services provided by local governments are called local public goods and can be regarded as examples of club goods.

Non-excludable but rival goods are called commons. For example, with regard to fishing in an ocean, it may be difficult to exclude someone from fishing in a particular area. Further, if someone fishes a great deal, this affects the amount of fish available for others. Some other natural resources also have a property of rivalness (see Table 11.1).

 
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