William Watson writes for the Fraser Institute’s Fraser Forum about what constitutes a “Public Good” vs. a Private Good. He draws on research which challenges the conventional notion that public goods should and must be funded by governments (with taxpayer dollars) because private entities don’t have any incentive to fund these things. This includes a liberty-oriented alternative to protectionism – e.g., patents and copyrights – of intellectual property: “Similarly, economist David Levine, a professor at Washington University in St. Louis, argues that intellectual property, which is conventionally thought to be a public good, does not need protection via patents and copyrights, the traditional means of providing artists and inventors with the legal monopoly power to charge others for the use of their ideas.”
Public date: November 12th, 2009Categories: News
Tags: copyrights, Fraser Institute, free enterprise, patents, protectionism, public goods, William Watson
November 13, 2009
The link for “Read article here” is not working.
November 14, 2009
2nd time in a week, Ian. Don’t know what it is with the dead link. Here’s the text of the article:
The term “public goods” is one of the most misunderstood
in economics. One misinterpretation
is that it is synonymous with “the public good,”
which is what governments are supposed to pursue but
which they so often seem to lose sight of. Another is that
“public goods” are goods and services supplied by the
public sector. There are many publicly provided goods
and services, but relatively few are “public goods”; the
great majority are “private goods.”
So what do economists mean by “public goods”? We use
the term to refer to goods (or services) characterized
by a particular set of technical characteristics—namely,
that people can consume them jointly and cannot be excluded
from consuming
them, or at least
can only be excluded
at a substantial cost.
The classic example is
a lighthouse. You and I could both get our bearings from
the same lighthouse at the same time and your doing so
would not reduce the usefulness of the lighthouse to me.
Moreover, it would be hard to exclude people from using
the lighthouse as anyone sailing by could use it simply
by looking at it. The lighthouse owner could not put a
turnstile on the ocean and prevent sailors from looking
at the lighthouse unless they paid a fee. If he wanted
to exclude others from using the lighthouse, he would
probably need to have a navy at his disposal.
Compare this idea of a “public good” with the idea of a
“private good.” A hamburger is an excellent example of
a private good. The hamburger you eat is not available
to me to consume. Our consumption is not and cannot
be joint. If we are both to have a hamburger, then there
must be two—one for each of us. If we share a hamburger,
then we each only get some fraction of it. We cannot
both get a whole hamburger out of the experience. Plus,
it is relatively easy to exclude someone from eating a
hamburger. McDonald’s does it every day. If you don’t
pay, you don’t get a Big Mac.
Are there many “public goods” like the lighthouse? Many
economists would argue that knowledge is a public good.
Your knowing that 2 + 2 = 4 does not prevent me knowing
it too, and it would be hard for anyone to exclude
others from that knowledge; word about 2 + 2 = 4 could
get around easily. Anyone who claimed the right to that
knowledge and tried to police it would have a hard time
doing so.
National defense is often thought to be a public good. If
an army defends a city, it defends everyone in the city,
whether or not they have helped pay for the army. Most
armies simply do not have the technology to let enemy
shells fall on districts that have not paid their defense
tax, but block barrages
on districts that have.
If some people within a
district have paid their
tax and others have not,
exclusion becomes impossible.
The army cannot defend the citizens who have
paid their taxes and not defend those who are in arrears
(unlike a fire department, for example, which could put
out fires in houses whose owners are fully paid up and
not put out fires in homes whose owners elected not to
pay their taxes).
Most things are a matter of degree, of course. In some
cases of joint consumption, the consumption experience
of various people is not exactly the same. For example,
we could both see the same play at the same time but it
is unlikely that we would sit in the same seat. You may
be front row center and I may have to sit in the balcony.
Or I may have a short theater patron in front of me and
therefore enjoy a completely unobstructed view, while
you may have a seat behind someone who is very tall.
In the same way, the ability to exclude isn’t zero to one—
either perfectly costless or completely impossible—but
is usually a question of cost. The formula for the world’s
most famous soft drink probably is not that much more
complicated than 2 + 2 = 4, but at considerable expense
William Watson
PUBLIC GOODS
How should they be provided?
http://www.fraseramerica.org Fraser Forum 11/09 31
to itself, the Coca-Cola company has managed to keep it
a secret for more than a century. Over-the-air television
signals can be jointly consumed by millions of people at
once, but it is possible, also at some expense, to exclude
those who have not paid a fee. For example, the British
government finances the British Broadcasting Corporation
with a license fee charged to every television set
owner (currently ?135.50 for a color TV), and it has at
times policed the fee—at great cost, presumably—by
having agents in signal-detecting trucks drive through
neighborhoods trying to uncover TV-signal poaching
by people who have not paid for a license.
How public goods should be provided is the question
about them that worries economists most. In the past,
academics believed that the free market would not
provide any public goods, or would provide a smaller number than was optimal. Why would anyone provide a
lighthouse, for instance, if they could not charge people
for its use? The obvious corollary was that only governments
could or would provide public goods.
That notion was overturned by University of Chicago
economist and 1991 Nobel Prize-winner the late Ronald
Coase, who, in a characteristically exhaustive article in
1974, traced the history of private lighthouses. He found
that people with important shipping interests would
provide for the safe passage of their ships even if this
enabled other people to steer by their lighthouses too.
Similarly, economist David Levine, a professor at Washington
University in St. Louis, argues that intellectual
property, which is conventionally thought to be a public
good, does not need protection via patents and copyrights,
the traditional means of providing artists and inventors
with the legal monopoly power to charge others
for the use of their ideas. In his obviously controversial
view, the sometimes substantial cost of using another
person’s inventions acts as natural protection for the income
those ideas can generate, while the head start that
innovators have on their competitors is another source
of commercial advantage. Not surprisingly, you can read
Professor Levine’s book on intellectual property for free
online; he has chosen not to try to exclude readers from
its benefits by charging them for it.
In the 1950s and 1960s, most economists thought that
if public goods were not provided by governments, then
they would not be provided at all. Thinking and research
since then suggest that there may be many cases—examples
include roads, parks, lighthouses and, Professor
Levine would argue, intellectual property—where the
market does a perfectly good job of providing public
goods. Even in some of these areas, government may
not be as crucial as is often thought.
Suggestions for further reading
Boldrin, Michele, and David Levine (2008). Against Intellectual
Property. Cambridge University Press.
Coase, Ronald (1974). The Lighthouse in Economics. Journal
of Law and Economics 17, 2: 357–76.
Schmidtz, David (1991). The Limits of Government: An Essay
on the Public Goods Argument. Westview Press.
*Key Concepts is a series of essays on the fundamentals of economics and markets. In addition to appearing in Fraser Forum, these
essays will form the basis of a live Ask the Professor discussion, held at http://www.fraserinstitute.org each month.
Please join us on November 25 at 11:00 am Pacific time for an online discussion of this essay with Prof. William Watson.