Chapter 9 Theory of public goods

This chapter discusses the class of goods that has come to be known as public goods or collective goods. A distinctive characteristic of such goods is that they are not used up in the process of being consumed or utilized as an input in a production process. To be considered public, a good must also be of interest to more than one consumer or firm. Otherwise, the fact that the consumption possibilities of others are undiminished is irrelevant. The chapter presents the derivation and interpretation of the efficiency conditions for pure public goods. The positive issues of the way the private market arrangements provide for public goods are discussed in the chapter. The chapter describes alternative mechanisms for making public goods decisions within the public sector. Public goods are of particular relevance to public policy, because they tend to be inefficiently provided by private arrangements, such as the market mechanism. The category of public goods is considered as opposed to public bads. Because they are not used up in the act of consumption of production, the marginal cost of extending service to additional users is zero. Private provision of the good, however, necessitates revenues from users to defray the cost of producing the good. Such charges usually lead some potential users to forgo consumption, creating a deadweight efficiency loss.