Lesson preview · Things markets won't provide
Public goods and common resources
~8 min · Free to read
Imagine a riverside town that often floods. A flood barrier would protect all 2,000 homes on the bank, and every household wants one. A builder offers to build it for 1.5 million dollars, if enough households pay 1,000 dollars each.
The money never arrives. Once built, the barrier protects every house, paid or not. So each household thinks: “If the others pay, I’m safe for free.” Someone who enjoys a good without paying is a free rider.
Key Term
Two questions to ask about any good
- Is it rival? A good is rival if one person’s use leaves less for others. Once you eat a sandwich, nobody else can. A street light shines as brightly for the next person: it is non-rival.
- Is it excludable? A good is excludable if people who don’t pay can be kept out. A cinema checks tickets. Nobody can keep a passer-by out of a street light’s glow: it is non-excludable.
The two answers give four kinds of good:
| Excludable | Non-excludable | |
|---|---|---|
| Rival | Private goods: a sandwich, a phone | Common resources: fish in the sea, groundwater |
| Non-rival | Club goods: a streaming service, a cinema screening | Public goods: street lights, flood barriers, lighthouses |
A public good is non-rival and non-excludable. A firm can’t charge for it, because it can’t keep out non-payers. So a market, left alone, supplies too little or none.
That is why governments usually pay for public goods from taxes: everyone must pay, so nobody can free ride. Try the game economists use to study free riding.
Each token you put in becomes 2 tokens shared by the group, but only half a token comes back to you. So whatever the others do, keeping your tokens pays. Yet if everyone keeps theirs, everyone gets 40 instead of 80. That is the free-rider problem, and it is why the flood barrier never got built.
In experiments like this, real players start by putting in about half their tokens, then give less each round until most give little or nothing. This finding is robust: across 12 such experiments, 73% of players gave nothing in the last round.
In a 2000 study, Ernst Fehr and Simon Gächter let players pay to punish free riders. Giving stopped falling, though punishing cost the punishers. In groups that kept the same players, over 4 in 5 put in everything in the last round.
This finding is mixed: a 2008 study in 16 places found punishment can fail where players also punish generous givers.
Trap · Common Misconception
"Public" doesn't mean "run by the government"
The two tests define a public good, not who supplies it. Governments supply private goods too, such as public housing: a flat can house only one family, and the government picks who gets it. And firms supply some public goods: adverts pay for commercial radio, which anyone can tune in to, however many others listen.
Anyone can fish in the open sea, so the fish are non-excludable. But they are rival: a fish you catch is one nobody else can. These are common resources.
One boat’s extra catch looks too small to matter, so its crew ignores the cost to others. But every boat thinks the same way, so the extra catches add up and fish numbers can collapse. In 1968 Garrett Hardin called this the tragedy of the commons (a commons is a resource everyone can use).
That happened to the northern cod off Newfoundland, in Canada. Factory ships and fish-finding sonar let fleets from many countries catch ever more. Governments set catch limits, but officials overestimated how many cod were left and kept the limits high to protect jobs.
Between 1962 and 1992, the weight of cod old enough to breed fell by more than 90 per cent. In July 1992 the government closed the commercial fishery, and about 30,000 people there lost their jobs. Apart from small catches, it stayed closed until 2024.
Key Term
Elinor Ostrom: users can protect a commons too
The usual fixes are government catch limits or a single owner. Elinor Ostrom, the first woman to win the economics Nobel prize, studied a third way: fish, pastures, forests and groundwater run by their own users.
In Nepal, farmers’ simple dams needed everyone’s help to maintain, so for a long time upstream farmers shared water with those downstream. Where the government built concrete dams that needed little shared upkeep, many projects failed: upstream farmers could take more than their share.
Ostrom found that users who help make the rules, and catch rule-breakers themselves, often run a commons well. But it doesn’t always work.
Trap · Common Misconception
Free to use doesn't make it a public good
Fish in the sea are free to use, like street lights, but they are rival, so they aren’t a public good. Ask both questions, separately.
Check yourself · no marks
A city’s main road is free to use. At 3 a.m. it is almost empty. At 8 a.m. it is jammed. What kind of good is it at each time?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 6
A town’s street lights shine on everyone who walks past. Which two features make them a public good?
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