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In economics, a public good (also referred to as a social good or collective good)Oakland, W. H. (1987). Theory of public goods. In Handbook of public economics (Vol. 2, pp. 485–535). Elsevier. is a goods that is both Excludability and non-rivalrous and which is typically provided by a government and paid for through taxation. Use by one person neither prevents access by other people, nor does it reduce availability to others, so the good can be used simultaneously by more than one person.For current definitions of public goods see any mainstream microeconomics textbook, e.g.: Hal R. Varian, Microeconomic Analysis ; Andreu Mas-Colell, Whinston & Green, Microeconomic Theory ; or Gravelle & Rees, Microeconomics . 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.
may be used to produce public goods or services that are "...typically provided on a large scale to many consumers."Tatom, J. A. (1991). Should government spending on capital goods be raised?. Federal Reserve Bank of St. Louis Review, 73(3), 3–15. Accessed at [1] 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,Joseph E. Stiglitz, "Knowledge as a Global Public Good" in Global Public Goods, official statistics, national security, , law enforcement, broadcast radio, flood control systems, aids to navigation, and street lights. 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, but also media, pictures and videos. For instance, knowledge can be shared globally. Information about men's, women's and youth health 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) is another source of knowledge 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.Rittenberg and Tregarthen. Principles of Microeconomics, Chapter 6, Section 4. p. 2. . Retrieved 20 June 2012. 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 debate in the literature on the definition of public goods, how to measure the significance of public goods problems in an economy, and how to identify remedies.
goods which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good...
Many mechanisms have been proposed to achieve efficient public goods provision in various settings and under various assumptions.
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, 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 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.
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 are not sufficient to support the project. If there is 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 allows users to condition their donation on the number of unique funders. Extensions such as the Street Performer Protocol consider time-limited spending commitments.
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.
In the Weisbrod model nonprofit organizations satisfy a demand for public goods, which is left unfilled by government provision. The government satisfies the demand of the median voters and therefore provides a level of the public good less than some citizens'-with a level of demand greater than the median voter's-desire. This unfilled demand for the public good is satisfied by nonprofit organizations. These nonprofit organizations are financed by the donations of citizens who want to increase the output of the public good.
Non-excludability: that is, it is impossible to exclude any individuals from consuming the good. Pay walls, memberships and gates are common ways to create excludability.
Pure public: when a good exhibits the two traits, non-rivalry and non-excludability, it is referred to as the pure public good. Pure public goods are rare.
Impure public goods: the goods that satisfy the two public good conditions ( Non-rival good and non-excludability) only to a certain extent or only some of the time. For instance, some aspects of cybersecurity, such as threat intelligence and vulnerability information sharing, collective response to cyber-attacks, the integrity of elections, and critical infrastructure protection, have the characteristics of impure public goods.
Private good: The opposite of a public good which does not possess these properties. A loaf of bread, for example, is a private good; its owner can exclude others from using it, and once it has been consumed, it cannot be used by others.
Common-pool resource: A good that is rivalrous but non-excludable. Such goods raise similar issues to public goods: the mirror to the public goods problem for this case is the 'tragedy of the commons', where the unfettered access to a good sometimes results in the overconsumption and thus depletion of that resource. For example, it is so difficult to enforce restrictions on deep-sea fishing that the world's Fish stocks can be seen as a non-excludable resource, but one which is finite and diminishing.
: are the goods that are excludable but are non-rivalrous such as private parks.
Mixed good: final goods that are intrinsically private but that are produced by the individual consumer by means of private and public good inputs. The benefits enjoyed from such a good for any one individual may depend on the consumption of others, as in the cases of a crowded road or a congested national park.
Debate has been generated among economists whether such a category of "public goods" exists. Steven Shavell has suggested the following:
when professional economists talk about public goods they do not mean that there are a general category of goods that share the same economic characteristics, manifest the same dysfunctions, and that may thus benefit from pretty similar corrective solutions...there is merely an infinite series of particular problems (some of overproduction, some of underproduction, and so on), each with a particular solution that cannot be deduced from the theory, but that instead would depend on local empirical factors.
There is a common misconception that public goods are goods provided by the public sector. Although it is often the case that government is involved in producing public goods, this is not always true. Public goods may be naturally available, or they may be produced by private individuals, by firms, or by non-state groups, called collective action.
The theoretical concept of public goods does not distinguish geographic region in regards to how a good may be produced or consumed. However, some theorists, such as Inge Kaul, use the term "global public good" for a public good that is non-rivalrous and non-excludable throughout the whole world, as opposed to a public good that exists in just one national area. Knowledge has been argued as an example of a global public good, but also as a commons, the knowledge commons.
Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good. This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally.
Some writers have used the term "public good" to refer only to non-excludable "pure public goods" and refer to excludable public goods as "club goods".
A digital public good is defined by the UN Secretary-General's Roadmap for Digital Cooperation, as: "open source software, open data, open AI models, open standards and open content that adhere to privacy and other applicable laws and best practices, do no harm, and help attain the SDGs."
Public goods are not restricted to human beings. It is one aspect of the study of cooperation in biology.
The free rider problem depends on a conception of the human being as Homo economicus: purely rational and also purely selfish—extremely individualistic, considering only those benefits and costs that directly affect him or her. Public goods give such a person an incentive to be a free rider.
For example, consider national defence, a standard example of a pure public good. Suppose Homo economicus thinks about exerting some extra effort to defend the nation. The benefits to the individual of this effort would be very low, since the benefits would be distributed among all of the millions of other people in the country. There is also a very high possibility that they could get injured or killed during the course of his or her military service. On the other hand, the free rider knows that they cannot be excluded from the benefits of national defense, regardless of whether they contribute to it. There is also no way that these benefits can be split up and distributed as individual parcels to people. The free rider would not voluntarily exert any extra effort, unless there is some inherent pleasure or material reward for doing so (for example, money paid by the government, as with an all-volunteer army or mercenaries).
The free-riding problem is even more complicated than it was thought to be until recently. Any time non-excludability results in failure to pay the true marginal value (often called the "demand revelation problem"), it will also result in failure to generate proper income levels, since households will not give up valuable leisure if they cannot individually increment a good.Graves, P. E., "A Note on the Valuation of Collective Goods: Overlooked Input Market Free Riding for Non-Individually Incrementable Goods ", The B.E. Journal of Economic Analysis & Policy 9.1 (2009). This implies that, for public goods without strong special interest support, under-provision is likely since cost–benefit analysis is being conducted at the wrong income levels, and all of the un-generated income would have been spent on the public good, apart from general equilibrium considerations.
In the case of , an inventor of a new product may benefit all of society, but hardly anyone is willing to pay for the invention if they can benefit from it for free. In the case of an information good, however, because of its characteristics of non-excludability and also because of almost zero reproduction costs, commoditization is difficult and not always efficient even from a neoclassical economic point of view.
For an example, consider a community of just two consumers and the government is considering whether or not to build a public park. One person is prepared to pay up to $200 for its use, while the other is willing to pay up to $100. The total value to the two individuals of having the park is $300. If it can be produced for $225, there is a $75 surplus to maintaining the park, since it provides services that the community values at $300 at a cost of only $225.
The classical theory of public goods defines efficiency under idealized conditions of complete information, a situation already acknowledged in Wicksell (1896). Samuelson emphasized that this poses problems for the efficient provision of public goods in practice and the assessment of an efficient Lindahl tax to finance public goods, because individuals have incentives to underreport how much they value public goods. Subsequent work, especially in mechanism design and the theory of public finance developed how valuations and costs could actually be elicited in practical conditions of incomplete information, using devices such as the Vickrey–Clarke–Groves mechanism. Thus, deeper analysis of problems of public goods motivated much work that is at the heart of modern economic theory.
An example of locally public good that could help everyone, even ones not from the neighborhood, is a bus service. If one is a college student who is visiting a friend who goes to school in another city that has bus service, one benefits from this bus service just like everyone that resides in and goes to school in said city. There is also a correlation of benefits and costs that one is now a part of. One is benefiting by not having to walk to one's destination by taking a bus instead. However, others might prefer to walk, so they do not become a part of the problems of automobile-exhaust pollution and congestion.
In 2019, economists developed the theory of local public goods with overlapping neighborhoods, or public goods in networks: both their efficient provision, and how much can be provided voluntarily in Nash equilibrium. When it comes to socially efficient provision, networks that are more dense or close-knit in terms of how much people can benefit each other have more scope for improving on an inefficient status quo. On the other hand, voluntary provision is typically below the efficient level, and equilibrium outcomes tend to involve strong specialization, with a few individuals contributing heavily and their neighbors free-riding on those contributions.
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