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Definition of a Public Good o Non-Excluded : Consumers are not or cannot be excluded from using the product. Think of a firework display as an example. o Non-Rival : “One individual’s consumption does not subtract from any other individual’s consumption.” With a firework display, I can watch the display (consume the good) without affecting your ability to watch the display (consume the good). Thus, the good
(the firework display) is non-rival. With a candy bar, for example, if I consume the good, you cannot. Thus, the candy bar is a rival good. o Example – Firework Display
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The Underlying Issue With Public Goods o The “free-rider” issue : Because of the non-excludable nature of the good, people think that they can let others pay for the good, and then “free-ride” on other’s purchase. The problem is that everybody (or at least a lot of people) think the same thing, and no one purchases the good.
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Example : Think of a firework company that sends out information regarding a proposed firework display in the city, requesting you mail in money to gain entry to the display. Because people think they can free-ride on others paying, they do not send in any money even if they think that the benefits of the firework display exceed the costs they are being asked to pay. o Externalities (another way to think of the problem) : Because the good is nonexculdable, when I purchase the good there is a positive externality on others who are then also able to consume the good (because they cannot be excluded from consuming it once I purchase it).
 Example : When the firework company sends out the request for funds to me, I consider the benefits and costs of mailing in the payment. The benefits are the effect my payment has on the quality of the show. The cost is the requested payment.
With, for example, a requested $5 payment, you can imagine that the effect the $5 will have on the quality of the show for me personally is trivial. Meanwhile the costs are $5. So the MB is likely smaller than the MC. The individual thus will not send in the payment. However, it may be the case that the MSB (the sum of the MB to all the members of the town) exceed the MC to me. In this case, the MSB is greater than the
MSC (which is just my MC), and it is socially efficient for me to send in my $5, but I do not, because is it not privately efficient to do so.
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The Result with Public Goods o No Good: no firm has an incentive to provide the good, since it is not profitable for the firm to provide the good due to the fact that many will not pay for the good.
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The Public Good Problem o The Socially Efficient Level of Production Is Not Reached : When the social benefit of the good exceeds the social cost, then it is socially efficient to have the good. However, the good will not be produced if it is a Public Good. o Example : imagine the firework display gave each individual in the town a benefit of $10, while the cost was only $5 per individual to put the show on. If there are 1000 people in the town, the benefit to the town of the firework display is $10,000 and the cost to the

town if $5,000. Thus, it is socially efficient to have the firework display as NG = B – C =
$5,000 to the members of the town. o Cost Benefit Analysis : Cost benefit analysis is used to determine if the social benefits of the good exceed the social costs.
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Solutions to the Public Good Problem o If possible, make the good excludable. With a bridge, for example, this is possible. Even with a road, this may be possible. o Pay for the goods with tax proceeds.
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Note, if a mayor of a town taxed everyone in the town to pay for the firework display, everyone in the town would be better off by $5 = $10 value - $5 cost (tax). Given the assumptions above, everyone would be happy with the mayor because the mayor has raised their net gain by $5 by compelling them to pay $5 for the fireworks show through use of a tax. The people would not want the mayor to repeal the tax, because that would imply a reduction in their net gain (the $5 in value create by the tax/firework solution would disappear).