Lighthouses are one of the most famous examples that economists give of public goods that cannot be privately provided. Monthly membership dues are used to provide a variety of public services. Private condominiums and retirement communities also are examples of market institutions that tie public goods to private services. The public and private goods are "tied" together. Therefore, the shopping mall finances the services through receipts from the sale of private goods in the mall. Charging directly for each of these services would be impractical. Shopping malls, for instance, provide shoppers with a variety of services that are traditionally considered public goods: lighting, protection services, benches, and rest-rooms, for example. Public goods can also be provided by being tied to purchases of private goods. Other supposed public goods, such as protection and fire services, are frequently sold through the private sector on a fee basis. Both throughout history and today, private roads have financed themselves by charging tolls to road users. Cable television services, for instance, scramble their transmissions so that nonsubscribers cannot receive broadcasts. Businesses frequently solve free-rider problems by developing means of excluding nonpayers from enjoying the benefits of a good or service. While most people are unaware of it, markets often solve public goods and externalities problems in a variety of ways. Policy debates usually focus on free-rider and externalities problems, which are considered more serious problems than nonrivalrous consumption. When polluting, factory owners may not consider the costs that pollution imposes on others. (Note that the free-rider problem and positive externalities are two sides of the same coin.) A negative externality arises when one person's actions harm another. If I cannot charge them for these benefits, I will not clean the yard as often as they would like. A positive externality arises when my neighbors benefit from my cleaning up my yard. That is nonrivalrous competition to watch the show.Įxternalities occur when one person's actions affect another person's well-being and the relevant costs and benefits are not reflected in market prices. If the field is large enough, however, exclusion is inefficient because even nonpayers could watch the show without increasing the show's cost or diminishing anyone else's enjoyment. A price will be charged for entrance to the field, and people who are unwilling to pay this price will be excluded. Assume the entrepreneur manages to exclude noncontributors from watching the show (perhaps one can see the show only from a private field). The second aspect of public goods is what economists call nonrivalrous consumption. If the free-rider problem cannot be solved, valuable goods and services, ones that people want and otherwise would be willing to pay for, will remain unproduced. Each person will seek to "free-ride" by allowing others to pay for the show, and then watch for free from his or her backyard. Even if the fireworks show is worth ten dollars to each person, no one will pay ten dollars to the entrepreneur. The fireworks example illustrates the "free-rider" problem. Because the entrepreneur cannot charge a fee for consumption, the fireworks show may go unproduced, even if demand for the show is strong. If an entrepreneur stages a fireworks show, for example, people can watch the show from their windows or backyards. Public goods have two distinct aspects-"nonexcludability" and "nonrivalrous consumption." Nonexcludability means that nonpayers cannot be excluded from the benefits of the good or service. Public health and welfare programs, education, roads, research and development, national and domestic security, and a clean environment all have been labeled public goods. Most economic arguments for government intervention are based on the idea that the marketplace cannot provide public goods or handle externalities.
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