Public goods

Public goods are products and services, such as lighthouses and national defence, that can only be collectively financed because it is not feasible to require each user to pay for their use.

The origins of the concept

In the 18th century, Adam Smith wrote:

"The third and last duty of the sovereign or commonwealth is that of erecting or maintaining those public institutions and those public works, which, although they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could not repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain .";

- in the 19th century, John Stuart Mill elaborated the idea, arguing as an example that it would be impossible to charge seamen according to their use of lighthouses

it is a proper office of government to build and maintain lighthouses, establish buoys, &c. for the security of navigation: for since it is impossible that the ships at sea which are benefited by a lighthouse, should be made to pay a toll on the occasion of its use, no one would build lighthouses from motives of personal interest, unless indemnified and rewarded from a compulsory levy made by the state. ;

- and in the 20th century, Paul Samuelson (who at first referred to public goods as "collective consumption goods") derived a formal proof of the proposition that "no decentralized pricing system can serve to determine optimally the levels of collective consumption"

Defining characteristics

Pure public goods are held to be:

• non-rivalous, meaning that anyone can benefit from them without diminishing their benefits to other people;
• non-excludable, meaning that no-one can be prevented from benefiting from them;

- and they are often:

• non-rejectable, meaning that nobody can avoid benefiting from them.
  

The term "club goods" is applied to products and services that are non-rivalous, but from which "non-members" are excluded.

The term "collective goods" is sometimes used to denote the broader category of products and services, including both private goods and public goods, that are collectively financed.

Rival interpretations

The concept is often interpreted to mean that non-rivalous and non-excludable products and services can only supplied by governments. That interpretation was challenged by Ronald Coase, who pointed out that English lighthouses had been privately supplied and financed in the 19th century. The broader interpretation adopted in this article follows Samuelson in stipulating only that they cannot be paid for by individual users - implying that, unlike private goods, their supply cannot respond to the normal action of market forces. But it does not exclude the possibility that they could be collectively financed by the private sector. It is widely assumed that the scope for the private sector financing of public goods must be limited by the opportunities it affords for "free-riding", but Elinor Ostrom has demonstrated ways in which that obstacle can be overcome. Public goods that are financed by the private sector are not in fact uncommon. Citizendium, for example, is non-rivalous and is constitutionally non-excludable and is thus a public good, but it is financed by voluntary contributions from its supporters.