Economics: Providing Public Goods

The lecture explores the concept of public goods in economics, focusing on their characteristics, how they are provided, and the challenges associated with them.

Public goods are shared goods or services that are impractical to make consumers pay for individually and to exclude non-payers.
Examples include roads, emergency services, and water dams.
A key characteristic is that any number of consumers can use them without reducing the benefits to any single consumer.

Pure public goods are non-excludable and non-rival in consumption.
- Non-excludable: Once provided, it is impossible to prevent anyone from benefiting.
- Non-rival: If someone benefits from the good, it does not reduce the amount available for others.
Public goods are also known as collective consumption goods.
Examples of public goods:
- Sanitation infrastructure
- Flood defense/tidal barrage
- Crime control for a community
- Reduced risk of disease from vaccinations
- Freely available knowledge (e.g., online learning)
- Public service broadcasting
Healthcare is typically NOT considered a public good because it is rival and excludable in consumption.

It's generally impractical to bill individuals for public goods.
- Should individuals receive a bill for a NASA space launch?
- Should individuals receive a bill for cleaning the White House?
Society often believes certain facilities/services should be available for all, regardless of their ability to pay.

Private providers often cannot charge those who benefit from the good or exclude non-payers.
Example: The creation of the first National Park (Yellowstone in 1872) ensured that natural resources Americans value would be protected.

Cost is a critical factor in determining whether something is produced as a public good.
1. The benefit to each individual is less than the cost each would have to pay if it were provided privately.
2. The total benefits to society are greater than the total cost.
If the market won't provide the good due to these factors, the government may need to step in.
Examples of public goods often provided by the government:
- Air Traffic Control
- Legal System
- Center for Disease Control

Public goods are financed by the public sector.
- Public sector: The part of the economy that involves the transactions of the government.
- Private sector: The part of the economy that involves the transactions of individuals and businesses.
There is little incentive for the private sector to produce public goods because of the difficulty in generating profit.

Step 1: A market failure occurs.
Step 2: A public good is created.
- Farmers want a local river to be dammed.
  - Benefit: The dam will provide flood protection.
  - Cost: If an individual farmer were to build the dam, the cost to him would outweigh the benefits.
  - Decision: No. The farmers would collectively benefit from the dam, but no single farmer will build it.
- The government considers funding the dam.
  - Benefit: The dam will provide flood protection.
  - Cost: If the cost is shared among all farmers, the cost to each farmer will be less than the benefit to each farmer.
  - Decision: Yes. The government will fund the project.
- Result: The benefits of the dam extend to so many people that their collective benefit exceeds the total cost of the dam.

Step 3: Externalities result from the creation of the dam and the lake.
Externality: An economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume.
Positive externalities (external benefits): Public goods generating benefits to many people, not just those who pay.
- Examples:
  - Swimming
  - Boating
  - Fishing
  - Lakefront views
  - Bee pollination
  - Research into new technology
  - Fire safety equipment
Negative externalities (external disbenefits): generate unintended costs and cause part of the cost of producing a good or service to be paid for by someone other than the producer.
- Examples:
  - Loss of wildlife habitat due to flooding upriver from the dam
  - Disruption of fish migration along the river
  - Overcrowding due to tourism
  - Noise from racing boats and other watercraft.
  - Traffic congestion
  - Spill over costs of obesity
  - Litter from tourists

Free rider: someone who would not choose to pay for a certain good or service but would get the benefits of it anyway if it were provided as a public good.
Example: Individuals may not pay $3500$ to purchase army helmets, but they benefit from a system of national defense whether they pay or not.
Example: You may not be willing to pay for a new freeway but you would use it if it was built; therefore, you’d be a free rider.
Free riders consume what they don’t pay for.
If the government stopped collecting taxes and relied on voluntary contributions, many public services would have to be eliminated.

Free riders are examples of market failures.
Market failures: situations in which the market does not distribute resources efficiently.
Successful free markets operate on choices made by individuals on what to be made, how much, and how.
Profit incentives attract producers, create competition, and provide goods and services.
In the new freeway example, there is no criteria for a properly functioning market system because there is no competition, and producers wouldn’t necessarily choose to build in low populated areas.

Non-excludability: Once provided, you can't stop anyone from benefiting.
Non-rivalry: If somebody benefits from a good, it doesn't reduce the amount available for others.
Free Rider Problem: Individuals have an incentive to use the good without contributing toward the cost.