Public Goods Problem

A problem in economics where a collective good or service must be sustained by mutualization of funds across different parties with different incentives while maintaining access.

Example:

Jim wants to be able to see as he walks along at night so he contributes to the cost and upkeep of streetlights. Mike also wants to have lit streets. Mike, however, recognises that if other people, like Jim, pay for street lights he can benefit from this without having to contribute because street lights are a public good; street lights are non-excludable and non-rival. Mike therefore does not contribute, but is able to enjoy well lit streets as others have paid for this public good. If everyone acted as Mike, no one would contribute to the public good. If people can benefit from a public good without paying for it, why would they pay for it? But if no one contributes, there will be no funding for public goods. This is what we call the public goods problem.

Associated problems:

  • Funding problem: How do we fund public goods?
  • Allocation problem: How do we coordinate decion making in deciding what public goods to fund/ how to allocate funds?
  • The free rider problem: How do we prevent free-riders and the associated collapse in provision of the public good?

The free rider problem

Mike is a free rider, enjoying the benefits of a public good (in this case street lights) without contributing to the costs of the good. This is what we call the free rider problem: the use of public goods by parties who do not contribute to their creation or upkeep while still extracting value from the service or good. This can lead to under-provision of a good or service.

Examples of public goods:

  • National defence
  • Open source software
  • City parks
  • Lighthouses
  • Street lights

References

  1. Oakland, William H. "Theory of public goods." In Handbook of public economics, vol. 2, pp. 485-535. Elsevier, 1987.
  2. Stiglitz, Joseph E. "The theory of local public goods." In The economics of public services, pp. 274-333. Palgrave Macmillan, London, 1977.
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