Via Bryan Caplan, I learned about a new paper by Frances Woolley on the difficulty of teaching the theory of “public goods”. I am very sympathetic to the paper because I feel that the term is among the most frequently misunderstood and misused terms in all economics (alongside “human capital” and “market failure”).
As I see it, the main problem with the phrase “public goods” is the strong tendency to use it synonymously with “government activities”. And I’m not only talking about how uninformed laypersons use the phrase. Even trained economists tend to see everything the government does as a solution to some public goods problem. This is a mistake. There are lots of things the government provides that are not public goods – such as education and health care services. Conversely, there are lots of public goods that are provided by private companies – think radio programs or internet search engines.
Woolley mentions that problem as well, but her main concern is that in talking about public goods we frequently mix up three distinct concepts:
- non-rivalry: does it cost more to provide the good to two or more persons than to one?
- non-excludability: is it feasible to exclude people from using the good?
- public finance: who pays for the goods in what way?
To be fair to my educators at the Uni Graz, I think they did try to keep the three concepts apart. I am just not sure that every student got the message. And I think Wolley is right to point out that some of the examples textbooks use to illustrate the concept such as “law and order”, “fire protection” or “national defense” are only public goods when viewed as abstractions:
The goods and services that go into creating ‘law and order’ are not themselves pure public goods: access to the courts is rival. The explosion of gated communities and private security firms is evidence of the excludability and rivalness of police protection. Fire protection is, from a technological point of view, excludable (the fire department can refuse to put out your fire if it chooses). Coase (1974) argued that lighthouses were, historically, often privately provided and financed, and changing navigational technology is making them obsolete. Parks are partially excludable (permits are required for hiking and camping at many national parks, for example).
In light of these considerations it is pretty hard to come up with real-world examples of pure public goods – challenge for the comments section: name pure public goods. I agree, therefore, with Woolley’s plea to de-emphasize public goods in introductory economics courses and address the issues related to non-rivalry and non-excludability separately.