Public Goods
Definition
Mark Cooper:
"A public good exhibits Nonrivalry in consumption and Nonexcludability. When producers cannot exclude individuals from consuming their good, the individuals using the good for free may withhold their support for the good, seeking a free ride. Where the costs of exclusion are high, the cost may outweigh the value of the good. This prevents producers from providing public goods, even when those goods are beneficial to the public." (http://cyberlaw.stanford.edu/system/files/From+Wifi+to+Wikis+and+Open+Source.pdf)
Description
1. Milton Fisk:
"There are really two independent parts to the standard concept of public good. This concept plays a prominent role in the recent phenomenon of extending the discussion of public goods to the global level. The first part has to do with the accessibility of public goods, whereas the second deals with the motivation for forming them.
The first part emphasizes that public goods cannot easily be exhausted as well as that they normally do not exclude anyone. With the supply that a public good affords being non-exhaustible, there is no added cost of having an additional individual benefit from it. So having an efficient market price of zero, it makes no sense for an entrepreneur to try to make a profit from selling benefits from a public good. Underfunding public goods will indeed lead to their exhaustion – both quantitatively and qualitatively – with the result that entrepreneurs will come forward to sell their benefits. Thus underfunding of water, education, and health care represent a basic neoliberal tactic for encouraging entrepreneurial intrusion. Long water outages, overcrowded classrooms, and waits for medical procedures are signs of public-good exhaustion, as are poor quality water, instruction, and health care.
Non-exclusion is the complement needed to non-exhaustion if there is to be general access to the benefits of a public good. If nobody is excluded from a public good, it would be futile to try to sell it, since anyone who comes to a store to buy it can simply go next door to the public good to get it gratis. Non-exclusion has been seriously eroded through wide acceptance of the myth about the abuse of the commons. User fees are a device for exclusion that is rationalized by charges that too many individuals are overusing public facilities and that it would be unfair to raise taxes on everyone simply to allow this abuse to continue. Those who cannot pay the user fees find themselves excluded from the benefits. Gradually public goods become ‘club goods’ for those who need them less."
2. Milena Popova:
"There's a theory in economics about things called "public goods". To understand the distinction between private goods, public goods and the couple of shades of grey in between, you first need to get your head around two concepts: rival and excludable.
Rival: (Wikipedia seems to call this "rivalrous", but when I were a young economist lass we used to call it rival so I'll stick with that.) A good is rival if my consumption of it diminishes the amount of the good that you can consume. Say we had 10 apples, and I ate one. There would now be 9 apples left which you could eat. If we had one apple and I ate all of it, tough luck, no apples for you. Knowing whether a good is rival or not tells you whether you want to use the market (if I were a good economist that would possibly be capital-M Market ;-) to allocate access to that good. If it's rival, then the market is an efficient way of allocating the good; if it's not, then you might want to think about other ways of getting your good to people. Remember that scary anti-piracy clip at the start of your DVDs which says "You wouldn't steal a handbag"? Hold that thought for a minute.
Excludable: A good is excludable if you physically have a way of stopping people from consuming it. Back to the apples: if they're in my fridge, inside my locked house and you don't have a key, you can't have my apples. (Yes, yes, you could break in. The law provides additional protection here, but ultimately there's probably a better way for you to obtain an apple than breaking into my house, right?) Knowing whether a good is excludable tells you whether you can use the market to distribute the good. If your good is excludable, go ahead and sell it on the open market; if it's not - you might struggle because you can't stop people from just taking it for free.
So. Most of the goods you deal with in your day-to-day life are both rival and excludable. We call them pure private goods. But there's a few things here and there that aren't as clear-cut, and this is where it gets a little messy.
If a good is rival, but not excludable, we call it a common good. In that case, we want to use the market to allocate that resource but it's actually quite difficult to do. Fish in the sea is a good example: my overfishing the seas stops you from being able to fish and leads to long-term damage to fish stocks, yet it's remarkably difficult to stop me from doing it using just market tools.
If a good is non-rival but excludable, we call it a club good. The classic example given in economics textbooks is cable television but I'm going to steer away from that for reasons which will become obvious. A better example for me is a golf course. My wandering around hitting a ball with a stick does not diminish your ability to do the same (as long as there's not thousands of us in the same place), and with a judicious application of fences I can stop you from coming in and therefore charge you money for the privilege (i.e. use the market). Is that the most efficient allocation of golf courses? Not necessarily, but it works, more or less, because they're excludable and therefore we can use the market.
Here's the important part: a good that is neither rival nor excludable is called a pure public good, and the market is neither a practical nor an efficient way of allocating that good. The textbook example here is national defence. I'm in the UK, so are you; the UK has an army which protects us both (Theoretically speaking - this is not about the value or otherwise of the army, kay?), no matter what either of us do. Purely by virtue of being here we benefit from it - there's no way of stopping one of us from benefiting from defence, nor does my enjoyment of this good in any way diminish yours."
(http://www.antipope.org/charlie/blog-static/2010/04/why-content-is-a-public-good.html)
3. From the Wikipedia:
"In economics, a public good (also referred to as a social good or collective good) is a good that is both non-excludable and non-rivalrous. Use by one person neither prevents access by other people, nor does it reduce availability to others.[1] Therefore, the good can be used simultaneously by more than one person. This is in contrast to a common good, such as wild fish stocks in the ocean, which is non-excludable but rivalrous to a certain degree. If too many fish were harvested, the stocks would deplete, limiting the access of fish for others. A public good must be valuable to more than one user, otherwise, its simultaneous availability to more than one person would be economically irrelevant.
Capital goods may be used to produce public goods or services that are "...typically provided on a large scale to many consumers." Similarly, using capital goods to produce public goods may result in the creation of new capital goods. In some cases, public goods or services are considered "...insufficiently profitable to be provided by the private sector.... (and), in the absence of government provision, these goods or services would be produced in relatively small quantities or, perhaps, not at all."
Public goods include knowledge, official statistics, national security, common languages, law enforcement, public parks, free roads, and many television and radio broadcasts. Flood control systems, lighthouses, and street lighting are also common social goods. Collective goods that are spread all over the face of the Earth may be referred to as global public goods. This includes physical book literature[dubious – discuss], but also media, pictures and videos. For instance, knowledge is well shared globally. Information about men's, women's and youth health awareness, environmental issues, and maintaining biodiversity is common knowledge that every individual in the society can get without necessarily preventing others access. Also, sharing and interpreting contemporary history with a cultural lexicon, particularly about protected cultural heritage sites and monuments are other sources of knowledge[incomprehensible malformed sentence] that the people can freely access.
Public goods problems are often closely related to the "free-rider" problem, in which people not paying for the good may continue to access it. Thus, the good may be under-produced, overused or degraded. Public goods may also become subject to restrictions on access and may then be considered to be club goods; exclusion mechanisms include toll roads, congestion pricing, and pay television with an encoded signal that can be decrypted only by paid subscribers.
There is a good deal of debate and literature on how to measure the significance of public goods problems in an economy, and to identify the best remedies."
(https://en.wikipedia.org/wiki/Public_good_(economics))
Discussion
Milton Fisk On Motivation
Milton Fisk says the standard theory of public goods is flawed, because it overemphasises self-interest and ignores the value of solidarity.
Self-Interest as Motivation
Milton Fisk:
"Since the 1950s, public goods have been thought of as remedies for market failures, and hence as little oases in a desert of market competition. On this view, they are exceptional, since by and large the market works. But this exceptionalism is a superficial matter, since at a deeper level those who take this view hold that there is common ground between the market and public goods. They think they can show that public goods are no exception to the liberal ideology that under girds the market. They refer, of course, to the view that self-interest is a motive that is adequate for the good society. Self-interest promotes public goods, on their view, since even those who don’t benefit directly from public goods benefit from the side-effects of having others benefit from them. So no appeal to solidarity with the disadvantaged is needed to make me want to cooperate with others in support of public goods.
he second part of the standard concept addresses the ultimate motivation for forming and maintaining institutions that provide benefits in a non-exhaustible and non-excludable way. In dealing with motivation, what we find here is a procrustean exercise in trying to adjust what is fundamentally a social matter to the individualist psychology behind neo-classical economics. The context is, then, the assumption of the adequacy of self-interest for arriving at cooperation. The question addressed is: What benefit must I receive in order to motivate me to pay my part of the cost of a public good from which you and many others will benefit? I can receive benefits from two sources, one comes directly from the public good and another comes indirectly from the others as a result of their receiving their direct benefits. Many times my direct benefit could be less than my part of the cost. Why then would I pay my part of the cost? I would pay it if the indirect benefit received as a spillover from you and the rest is at least sufficient, along with my direct benefit, to match my part of the cost. In sum, strong positive externalities make for the kind of cooperation that is required by public goods.
The kind of externality involved here can be illustrated by pollution abatement. Global warming can be controlled by countries reducing their carbon dioxide emissions. Why, though, should a given country cooperate in this effort if in doing so it has to spend more on abatement than it gains from less environmental damage to it? For an answer one needs to consider other things such as the effect of reducing global warming on the economies of other countries. Those economies can, then, remain robust thereby preventing a collapse of trade and investment with our given country. This spillover between countries might be just what is needed in order to promote cooperation.
However, being a free rider rather than a cooperator still allows our country to benefit. This poses a serious problem for those who rely solely on self-interest. Our country could do nothing and, in principle, still enjoy the positive externalities from the cooperation among others. Their self-interest would keep them trading and investing despite the defection of our given country. With less costs the benefits it receives would be much the same as if it had cooperated. In sequence, several other countries, including a few large greenhouse gas emitters, might choose not to cooperate with others on the same grounds. By the time all these countries had decided to go it on their own, the abatement would be so small that there would cease to be a net benefit for those who still cooperated. Once it became evident to them that their cooperation was futile, self-interest would terminate the entire endeavor to reduce greenhouse gas.
A total collapse of cooperation might be avoided by a strategy of incentives for those tempted to defect from cooperation. A leading country might, for example, use loans to certain other countries for their priority domestic projects as incentives for their following it in funding a global public good. Even if we assume that such a strategy can generate a level of cooperation, we still have to ask whether self-interest, in the absence of solidarity, can provide cooperation at the high level needed to form and maintain public goods." (http://www.globaljusticecenter.org/papers/fisk.htm)
Solidarity as Motivation
Milton Fisk:
"The key feature of a response to the standard, self-interested view of public goods is the concept of a social goal. I have already indicated that our public goods are to be understood as instrumental to our social goals, understood here as together defining the kind of society we want to live in. Putting public goods inside the context of social goals is missing in what I’ve called the standard concept of public goods. This absence is relevant since the standard concept considers public goods as primarily instruments for the benefits of individuals, whether they be persons, groups, or nations. The conflict here is over the kind of teleology to emphasize in discussing public goods.
So public goods help us reach a certain kind of society – one, say, that is healthy, that gives protection from damaging radiation, that is financially stable, and that is democratic. Whatever the kind of society aimed at, it is not to be treated as only a potential for individual benefits. Of course, such a potential will result from reaching a social goal, and we would have no reason for wanting a society of a certain kind apart from a potential for the individual benefits normally associated with a society of that kind. Still, there is more to reaching a society of a certain kind than merely developing a potential for the corresponding individual benefits
What then is missing in the standard concept? It is that having a society of a certain kind offers a forceful type of resistance to doing away with the potential for getting the corresponding individual benefits. The potential becomes robust since it is embedded within the way the society sees itself. Several things are involved in this appeal to the social. On the one hand, there is widespread agreement on one or more social goals. On the other hand, pursuing those goals is considered a project of the society rather than of benefactors who though ostensibly favoring those goals turn out to have a different agenda. Clearly not all potentials for individual benefits come about in a way that satisfies these conditions. Hence they will not be protected as forcefully as those that come from pursuing a certain kind of society.
Through one of his Open Society foundations George Soros could decide to buy antiretroviral HIV/AIDS medicines for those infected in South Africa. This could be seen as promoting the kind of society in which drugs are accessible. But as promoted by purchasing drugs from the multinational pharmaceuticals, the foundation’s generosity could also be seen as maintaining the status quo on patent rights, which in a larger context would mean the continued inaccessibility of costly drugs.
The key source of this resistance to doing away with a public good is not, then, in the technology of a public good, in the bureaucracy that may operate it, or in financial angels. Instead, it comes from the continuing agreement on and commitment to a social goal by the people of a society. Thus it is, for example, that even the recent neoliberal governments of Canada have lacked the courage to try to end Canada’s system of public health insurance. The commitment among Canadians to having a healthy society has created a robust potential for getting health benefits to all. What is wanted in a society is the assurance offered by robust potentials that the ways it sees itself aren’t illusory.
One of the reasons that privatization is opposed is that it does away with such an assurance. Under pressure from the international financial institutions, the forceful resistance arising from the way a society sees itself may still be overwhelmed. Water privatization, for example, removes any assurance the poor in struggling countries can get potable water. In South Africa in 1998 the trade union federation, COSATU, allowed water to be privatized in Dolphin Coast after weakening its opposition to water privatization under pressure from the neoliberal leadership of the ruling African National Congress, with which it is closely allied. But in Bolivia in 2000, a popular alliance defeated the privatization of water in Cochabamba that had been recommended by the World Bank and was being carried out by a consortium led by Bechtel. The dramatic nature of the resistance of that alliance stemmed from a generalized commitment to being part of a society with water accessibility.
Another problem with the standard concept is that it relies heavily on externalities. It appeals to externalities in order to stay within the orbit of self-interest. Where externalities are ignored between two regions, there will be an equilibrium in regard to what each contributes toward a public good that is sub-optimal. That is, their total welfare could be enhanced by making greater contributions than they do. The equilibrium, called the Nash equilibrium, could be shifted to a higher welfare level if each region took account of the spillins coming from the other. In other words, this awareness would lead to a larger contribution by each to provision of the public good.
This kind of reasoning, though the product of ‘a beautiful mind’, is largely irrelevant to the dynamics of initiating and supporting public goods. Take the living wage campaigns going on around the US today. They concentrate on employees who wages involve, directly or indirectly, the use of public funds. The people behind the living wage almost all make much more than the living wage. The majority of tax payers who will pay whatever increase in taxes is levied for a living wage are themselves making a living wage. Moreover, neither the advocates nor the majority of taxpayers anticipate a change, either upward or downward, in their economic situation as a result of the success of their campaigns. Why would they support a living wage where public funds are being used?
The answer that I find compelling is that those who advocate and those who pay for it think it is fair. A sense of fairness is quite widespread, so when people are told about single mothers working for $6 an hour making beds and cleaning toilets in hotels without subsidized childcare or transportation, they respond that it’s a shame, it’s cruel, or it’s greed. Reactions like these show that people have a sense of fairness. Moreover, having a sense of fairness supposes not just compassion with those seen as victims of unfairness but, if it is genuine, it also supposes a readiness to give support at least at some minimal level to doing away with that unfairness. There is then solidarity involved, the kind of solidarity involved in making the society a place that accords better with the aspirations we have for it. We saw this solidarity recently when free trade types said women in sweatshops in the Dominican Republic or in China were paid sub-living wages so clothing would be more affordable for people making higher wages. The response by samplings of US consumers was that they would be willing to pay a dollar or so more per item if it went toward bringing sweatshop workers out of poverty rather than to those in the chain of middlemen.
The standard concept of public goods is, then, doubly flawed. It is flawed not just by failing to specify that public goods don’t exist outside a context of the forceful resistance to undermining them provided by commitment to a certain kind of society. But it is also flawed by failing to recognize that, since self-interest leads to defections from cooperation even when positive externalities are taken into account, solidarity is the needed motivation for having public goods." (http://www.globaljusticecenter.org/papers/fisk.htm)
Public Goods in a Neoliberal Context
Milton Fisk:
"Public goods represent an alternative to the race to the bottom under the banner of market competition. Making them the cornerstone of the national and global economies would imply a vast structural change. This change would increase the assurance of access to important goods and services. Of almost equal importance is the possibility that, with genuine public accountability and participatory management, these public goods will be fair to those who work within them.
One doesn’t need to say that this is as far as change should go. It may only be the beginning of a series of structural changes, for having public goods is, at least at first, compatible with private, profit-making enterprises. So, public goods may still be challenged by those promoting investments for private profit. This dialectic between the public and the private could always open up the possibility of counter-reform, as happened toward the end of the 20th century.
At present, though, the goal is to reinvigorate and expand public goods as the negative reaction to neoliberal globalism deepens. The opportunities offered for pursuing this goal by the collapse of Enron and of the Argentine economy need to be seized. The deregulatory climate that Enron itself helped create will lead to a widespread corruption of even those standards that make doing business in capitalist markets possible. The IMF’s obsession with labor austerity as a lure to investors increased poverty and unemployment in Argentina to the point that the economy as a whole collapsed. The possibility exists of a rejection by a string of nations of the bankers’ discipline being imposed by the US and the international financial organizations it backs.
There are several ways a revival of public goods would impede the development of neoliberal globalism. The dominance of financial capital would be curbed by giving more importance to basic needs. This would lead to more regulation of capital flows and to treating more and more resources in a way that does not turn them into sources of profit – decapitalizing them. Neoliberal globalism, which promotes flexible labor, would also be curbed by public goods that offer protections for labor, such as job security, decent workplace regimes, and living wages. Institutions for these protections would be public goods that might be both national and international. Finally, the dominance of a liberal trade and service policy that serves the interests of capital would be curbed by a mechanism for setting trade and service policy that is guided by widely accepted social goals. For this to happen, such a mechanism would have to be more representative of the peoples and nations of the world."
(http://www.globaljusticecenter.org/papers/fisk.htm)
Mechanisms have been proposed to achieve efficient public goods provision
From the Wikipedia:
"Many mechanisms have been proposed to achieve efficient public goods provision in various settings and under various assumptions.
Lindahl tax
A Lindahl tax is a type of taxation brought forward by Erik Lindahl, an economist from Sweden in 1919. His idea was to tax individuals, for the provision of a public good, according to the marginal benefit they receive. Public goods are costly and eventually someone needs to pay the cost.[10] It is difficult to determine how much each person should pay. So, Lindahl developed a theory of how the expense of public utilities needs to be settled. His argument was that people would pay for the public goods according to the way they benefit from the good. The more a person benefits from these goods, the higher the amount they pay. People are more willing to pay for goods that they value. Taxes are needed to fund public goods and people are willing to bear the burden of taxes.[11] Additionally, the theory dwells on people's willingness to pay for the public good. From the fact that public goods are paid through taxation according to the Lindahl idea, the basic duty of the organization that should provide the people with this services and products is the government.
Vickrey-Clarke-Groves Mechanism
Vickrey-Clarke-Groves mechanisms (VCG) are one of the best studied procedures for funding public goods. VGC encompasses a wide class of similar mechanisms, but most work focuses on the Clarke Pivot Rule which ensures that all individuals pay into the public good and that the mechanism is individually rational.
The main issue with the VCG mechanism is that it requires a very large amount of information from each user. Participants may not have a detailed sense of their utility function with respect to different funding levels. Compare this with other mechanisms that only require users to provide a single contribution amount. This, among other issues,[13] has prevented the use of VCG mechanisms in practice. However, it is still possible that VCG mechanisms could be adopted among a set of sophisticated actors.
Quadratic Funding
Quadratic funding (QF) is one of the newest innovations in public goods funding mechanisms. The idea of Quadratic voting was turned into a mechanism for public goods funding by Buterin, Hitzig, and Weyl and is now referred to as quadratic funding.
Quadratic funding has a close theoretical link with the VCG mechanism, and like VCG, it requires a subsidy in order to induce incentive compatibility and efficiency. Both mechanisms also fall prone to collusion between players and sybil attacks. However, in contrast to VCG, contributors only have to submit a single contribution - the total contribution to the public good is the sum of the square roots of individual contributions. It can be proved that there is always a deficit that the mechanism designer must pay.
One technique to reduce collusion is to identify groups of contributors that will likely coordinate and lower the subsidy going to their preferred causes.[15]
Assurance Contracts
First proposed by Bagnoli and Lipman, assurance contracts have a simple and intuitive appeal. Each funder agrees to spend a certain amount towards a public good conditional on the total funding being sufficient to produce the good. If not everyone agrees to the terms, then no money is spent on the project. Donors can feel assured that their money will only be spent if there is sufficient support for the public good. Assurance contracts work particularly well with smaller groups of easily identifiable participants, especially when the game can be repeated.
Several crowdfunding platforms such as Kickstarter and IndieGoGo have used assurance contracts to support various projects (though not all of them are public goods).
Assurance contracts can be used for non-monetary coordination as well, for example, Free State Project obtained mutual commitments for 20,000 individuals to move to New Hampshire in a bid to influence the politics of the state.
Alex Tabarrok suggested a modification called dominant assurance contracts where the mechanism designer gives every contributor a refund bonus if the contract fails. For example, in addition to returning their contributions, the mechanism designer might give all contributors an additional $5 if the total donations aren’t sufficient to support the project.
If there’s a chance that the contract will fail, a refund bonus incentivizes people to participate in the mechanism, making the all-pay equilibrium more likely. This comes with the drawback that the mechanism designer must pay the participants in some cases (e.g. when the contract fails), which is a common theme.
Zubrickas proposed a simple modification of dominant assurance contracts where people are given a refund bonus proportional to the amount they offered to donate, this incentivizes larger contributions than the fixed refund from Tabarrok’s original proposal.
There have been many variations on the idea of conditional donations towards a public good. For example, the Conditional Contributions Mechanism allows donors to make variable sized commitments to fund the project conditional on the total amount committed. Similarly, the Binary Conditional Contributions Mechanism [19] allows users to condition their donation on the number of unique funders. Extensions such as the Street Performer Protocol consider time-limited spending commitments.
Lotteries
Lotteries have historically been used as a means to finance public goods. Morgan [20] initiated the first formal study of lotteries as a public goods funding mechanism. Since then, lotteries have undergone extensive theoretical and experimental research. Combined with their historical success, lotteries are a promising crowdfunding mechanism.
They work by using an external source of funding to provide a lottery prize. Individual “donors” buy lottery tickets for a chance to receive the cash prize, knowing that ticket sales will be spent towards the public good. A winner is selected randomly from one of the tickets and the winner receives the entire lottery prize. All lottery proceeds from ticket sales are spent towards the public good.
Like the other mechanisms, this approach requires subsidies in the form of a lottery prize in order to function. It can be shown that altruistic donors can generate more funding for the good by donating towards the lottery prize rather than buying tickets directly.
Lotteries are approximately efficient public goods funding mechanisms and the level of funding approaches the optimal level as the prize grows. However, in the limit of large populations, contributions from the lottery mechanism converge to that of voluntary contributions and should fall to zero."
(https://en.wikipedia.org/wiki/Public_good_(economics))
More Information
- Public Good
- Milena Popova: Why Content is a Public Good]
Papers:
- Global Public Goods and Self-Interest. By Milton Fisk, Indiana University
- Advancing the Concept of Public Goods
In our wiki: