Public Goods

Public goods are economic goods defined by their unique traits of non-rivalry and non-excludability. These goods are typically provided by the government, as they are unlikely to be produced by private businesses under normal market conditions (market failures). Economic goods can be categorized as either private or public. While private goods require little elaboration, public goods have been extensively studied, and we’ll offer a brief overview here, directing readers to textbooks for more in-depth analysis. Public goods fundamentally depend on government intervention for their existence. Due to their critical societal role, they have been a subject of study since ancient times. Economist Paul Samuelson identified the following key characteristics of public goods:

• Indivisibility. Indivisibility means that a good or service cannot be physically or economically divided to be allocated exclusively to a particular consumer or user. A clear example of an indivisible public good is clean air, military defense, or public safety. When the air is clean, everyone benefits equally by breathing it. Conversely, when the air is polluted, everyone suffers its consequences. The same applies to public safety, law enforcement, and national defense. For example, if the defense of national borders is inadequate, the consequences affect everyone. In such cases, public goods must be made available universally to fulfill their purpose.
• Non-Rivalry. Non-rivalry means that one person’s consumption of a public good does not diminish its availability for others. Examples include public safety, national defense, the preservation of cultural heritage, and the protection of private property. These public goods benefit all citizens equally, without restriction.
• Non-Excludability. Non-excludability refers to the inability to prevent individuals who have not paid for a public good from enjoying its benefits. This limitation can be technical or economic. For instance, a tax evader still benefits from military defense or public safety services, despite not contributing financially. Unless tax evasion is actively addressed, it’s impossible to exclude non-payers from enjoying public goods such as roads, national defense, or law enforcement. Similarly, a lighthouse emits light signals to guide ships safely to shore. It’s technically impossible to charge a fee for the light or to prevent non-payers from benefiting. Without stronger measures to address tax evasion, public goods remain accessible to all, regardless of contribution.

Samuelson used these three features to define what he termed a pure public good. However, it’s important to note that very few public goods fully meet this definition. Pure public goods make up only a small subset of all public goods. Most public goods exhibit some but not all of these characteristics and are categorized as impure public goods. These goods share certain traits of public goods while also displaying features typical of private goods.

Non-Rivalry and the Demand Curve. The production of public goods reaches optimal efficiency when the marginal rate of transformation equals the sum of the marginal rates of substitution across the community. Because an individual’s consumption of a public good doesn’t reduce its availability to others, the demand curve for public goods is constructed differently than for private goods. Specifically, the demand for public goods is derived by vertically summing individual marginal rates of substitution, whereas the demand for private goods is obtained through a horizontal summation of individual demands.