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Public Good in Economics: Definition, Theory & Examples

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  • 0:00 What Are Public Goods?
  • 1:30 The Theory
  • 2:16 Examples
  • 4:17 Lesson Summary
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Lesson Transcript
Instructor: Jennifer Francis

Jennifer has a Masters Degree in Business Administration and pursuing a Doctoral degree. She has 14 years of experience as a classroom teacher, and several years in both retail and manufacturing.

Have you ever gone to the mall when there was a power outage at your house or gone into a nice cool cafe on a hot day to beat the heat? This lesson defines and discusses the theory of public goods. You will learn what public goods are and how to identify them.

What Are Public Goods?

Believe it or not, we receive free goods and services every day! We're just so accustomed to them that we don't often notice. For example, when you relax in a cool cafe on a hot summer day, you are receiving the benefit of air conditioning that you are not paying for. This is an example of a public good. Public goods are products or services we all use. Because we all use them, each of us cannot be charged individually for them. The café you enjoy couldn't really put a number on how much air conditioning you enjoyed during your visit, so the owners cannot fairly charge you for it.

Public goods are typically financed by business owners or the government through tax revenues. When a public good is consumed, the amount left for others to consume is not reduced, and it cannot be withheld from those who are unable to pay for it. For example, when you enjoy the air conditioning in a café, there is not less air conditioning for others to enjoy. There is no competition to provide public goods because they are supplied to everyone. The police force is a good example of this. When we feel unsafe because we have heard strange noises late at night, we do not select which company to call. We simply call the police. Because there is no competition among producers and providers for public goods, they are referred to as non-rivalrous and non-excludable. Non-excludable means that no one can be denied the service. For example, anyone who feels unsafe can call the police.

The Theory

The theory of public goods was postulated by Paul Samuelson (1954). It states that goods that are collectively consumed are non-rival and non-excludable. He also referred to the theory as The Pure Theory of Public Expenditure. The theory highlights what Samuelson referred to as free riders--those who pretend to have less than they do in order to participate in the collective consumption without contributing to its maintenance. An example of the free rider aspect of the theory would be the entrepreneur who is charging $10 for customers to watch the July 4th fireworks. Rather than pay, many free riders allow others to pay, while they enjoy the show from their windows or yards or from a nearby public area.

Examples

Some common examples of public goods are statistics and other types of information, the police, the armed forces and national defense, recreation parks, basic television, and radio. All members of society benefit from these public goods, regardless of social status. The types of information and statistics that are considered public goods include the data gathered from censuses such as median household incomes, crime rates, and the racial and ethnic composition of particular geographic regions. The government makes this information available to anyone who wishes to have it.

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