![]() How do we decide which public goods, and how much of them, and in what ways to produce these goods? For private goods, we know that under the right conditions there's an invisible hand process which leads to the maximization of social surplus. After all, if these goods are valuable, but markets have trouble producing them, we'd like some other way to produce these goods.īut there's a problem. Why exclude when there's no cost to serving an additional consumer? So how can we produce public goods? These goods provide an argument for taxation and government provision. In addition, nonrivalry means that it's inefficient to exclude anyone. Public goods challenge markets because nonexcludability means that it's difficult to charge non-payers, the free rider problem. For now, we're going to say a little bit more about public goods and how to produce them. We'll be saying more about the two other cases: common resources - nonexcludable, but rival, like tuna in the ocean and club goods - excludable but not rival, like Wi-Fi, in future videos. Public goods - those goods which are both nonexcludable and nonrival, therefore provide a challenge to markets. Now is national defense rival or nonrival? Does one person's benefiting from national defense reduce my benefit? No. ![]() But if everyone free rides and doesn't pay, then national defense doesn't get produced. Since it's hard to exclude non-payers, there's an incentive not to pay, and to try to free ride. We sometimes refer to the nuclear umbrella to reflect the idea that it's hard to exclude people from the benefits of national defense. If some people bought a nuclear missile to deter another country, that deterrence benefits everyone, even those who don't pay. ![]() Is it excludable? Suppose we try to use markets to provide national defense. National defense and mosquito control are other examples. We've already given asteroid deflection as one example. Now let's turn to public goods - nonexcludable and nonrival. We covered this earlier in the equilibrium chapter. Rivalry means that excluding non-payers doesn't waste resources, because it costs more to produce more of these goods, and we only want to supply more when people are willing to pay the additional cost. So consumers have an incentive to pay, and producers therefore have an incentive to produce these goods. Markets are great at providing these goods because excludability means that only people who pay get the good. ![]() These are the private goods: jeans, hamburgers, contact lenses, and so forth. Let's look at the most familiar category first - goods that are excludable and rival. In fact, these two categories, nonexcludable and nonrival, divide goods into four possible types. For asteroid deflection, the more the merrier. But asteroid deflection is nonrival, because if one person is using asteroid deflection that doesn't reduce the ability of another person to benefit from the same asteroid deflection. Jeans are rival and asteroid deflection is nonrival, because if one person is using a pair of jeans, it's pretty difficult for another person to use the same jeans at the same time. Nonrival means that one person's use of the good doesn't reduce the ability of another person to use the good. If the asteroid is prevented from hitting the earth, everyone's going to benefit whether they paid for it or not. But it's hard to prevent people who don't pay for asteroid deflection from benefiting from asteroid deflection. Jeans are excludable, and asteroid deflection is nonexcludable, because it's easy to prevent people who don't pay for jeans from using the jeans. Nonexcludable means that people who don't pay cannot be easily prevented from using the good. In this video, we'll explain what these terms mean and why public goods can challenge markets. In the first video in this chapter, we introduced public goods and the terms: nonexcludable and nonrival.
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