Tyler Cowen, in the Concise Encylopedia of Economics (reference below), describes public goods as having two distinct aspects: nonexcludability and nonrivalrous consumption.
“Nonexcludability means that the cost of keeping nonpayers from enjoying the benefits of the good or service is prohibitive. If an entrepreneur stages a fireworks show, for example, people can watch the show from their windows or backyards. Because the entrepreneur cannot charge a fee for consumption, the fireworks show may go unproduced, even if demand for the show is strong.
“The fireworks example illustrates the related free-rider problem. Even if the fireworks show is worth ten dollars to each person, arguably few people will pay ten dollars to the entrepreneur. Each person will seek to “free ride” by allowing others to pay for the show, and then watch for free from his or her backyard. If the free-rider problem cannot be solved, valuable goods and services – ones people otherwise would be willing to pay for – will remain unproduced.
“The second aspect of public goods is what economists call nonrivalrous consumption. Assume the entrepreneur manages to exclude noncontributors from watching the show (perhaps one can see the show only from a private field). A price will be charged for entrance to the field, and people who are unwilling to pay this price will be excluded. If the field is large enough, however, exclusion is inefficient. Even nonpayers could watch the show
without increasing the show’s cost or diminishing anyone else’s enjoyment. In other words, the relevant consumption is nonrivalrous. Nonetheless, nonexcludability is usually considered the more important of the two aspects of public goods. If the good is excludable, private entrepreneurs will try to serve as many fee-paying customers as possible, charging lower prices to some customers if need be.”
Cowen’s colleague, Alex Tabarrok, has created two videos (right, references below) to illustrate these points comparing the public good of asteroid defence with the non-public good of a pair of jeans.
Atlas topic, subject, and course
Tyler Cowen, Public Goods, The Concise Encyclopedia of Economics, at http://www.econlib.org/library/Enc/PublicGoods.html, accessed 2 May 2016.
Alex Tabarrok, Public Goods and Asteroid Defense (3-minute video), Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/public-goods-example-asteroid-defense, accessed 9 May 2016.
Alex Tabarrok, A Deeper Look at Public Goods (8-minute video), Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/public-goods-definition-nonexcludable-nonrival, accessed 9 May 2016.
Page created by: Ian Clark, last modified 9 May 2016.
Image: The Decline of Scarcity, at http://declineofscarcity.com/?p=2706, accessed 2 May 2016.