Public Goods Problem

Abstract Public goods (as opposed to private goods) are nonrival in consumption: once the good is provided, the additional resource cost of another person consuming the good is zero. Public goods are also nonexclusive: the consumption of a good is non‐excludable when it is either very costly or impossible to prevent others from consuming the good. National defense and street lighting are examples of public goods. However, the definition of a public good is not absolute; it depends on market conditions, the state of technology, and legal arrangements. If public goods are provided by private companies, then their level of production will be suboptimal and correspondingly the incentives for overuse are greater. A free‐rider problem occurs as consumers cannot be excluded from the consumption of a public good, and they may try to avoid paying for their consumption of this good. In addition, it is difficult to determine the true market demand for public goods. The public goods problem can be improved on by changing, assigning, or creating property rights. When property rights are secure and tradable and transactions costs are low, the Coase Theorem suggests that people will trade rights until the new pattern of ownership is efficient.