- Public goods
Also called collective goods. These are a very special class of goods which cannot practically be withheld from one individual consumer without withholding them from all (the “nonexcludability criterion”) and for which the marginal cost of an additional person consuming them, once they have been produced, is zero (the “nonrivalrous consumption” criterion). The classic example of a nearly pure public good is national defense: you cannot defend the vulnerable border regions of a country from the ravages of foreign invaders without also simultaneously defending everyone else who lives within the borders. The inability of potential providers to exclude people who refuse to pay from nevertheless consuming and benefitting from an expensive public good usually means that very many of the consumers of the good will act as free riders and choose not to help pay for its provision. Consequently private production of the good or service may prove unprofitable, and the good or service thus may not be provided at all by the free market — even though everyone might concede they would be better off with some positive level of production of the good in question.
Actually, the public goods problem is not quite as hopeless as the simple version of the theory makes it sound. Various social arrangements have evolved to encourage the provision of public goods. The non-profit “third sector” of the economy devotes considerable effort to the provision of public goods financed by voluntary contributions that are motivated by appeals to people's “civic conscience” (or to their desire for the honors and respect that the community spontaneously accords to “public benefactors”). Voluntary contributions may also be gathered from those people most intensely and deeply concerned about the particular social need being addressed or from those who can be “shamed” into it by informal social pressures that withdraw status and respect from people identified and stigmatized as free riders.
In addition to these non-profit approaches, the provision of public goods may often be handled through ordinary market forces if some way can be found to link the consumption of the public good to the consumption of some other good that does not suffer from the “non-excludability” problem and hence can generate a profit. A shopping mall offers good examples of such “tying” arrangements. The mall management provides such public goods to shoppers as security protection, a clean and pleasant environment, public water fountains and rest rooms, entertainment, etc. without direct charges — but, since these amenities attract larger crowds of customers to the mall and increase sales for the stores located there, the mall's owners are able to command higher rents from their tenants.
It should also be noted that at least a partial provision of public goods often occurs when there is a single person (or a rather small group of persons) who feel they stand to benefit personally from a particular public good to such an unusually large degree that it is worthwhile for them to go ahead and just pay for the whole thing while ignoring the many other small-time free riders as irrelevant. (Remember, by the definition of a public good, the free riders' additional consumption does not cost anything extra.)
The classic “solution” to the problem of under-provision of public goods has been government funding through compulsory taxation (often, but not necessarily, accompanied by actual government agency production of the good or service in question). Although this may substantially alleviate the problem of numerous “free riders” that refuse to pay for the benefits they nevertheless love to receive, it should be noted that the political process does not provide any very plausible method for determining what the “optimal” level of provision of a public good actually is. When we cannot observe what individuals are willing to give up in order to get the public good, how can we (or the politicians) assess how urgently they really want more or less of it, given the other possible uses of their money? So any given public good will still most likely be either under-provided or over-provided under government stewardship. Note also that the “public goods” problem is an extreme special case of the more general problem of externalities.