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Public Goods - Should they be always provided by the government?

Essay 2007 9 Seiten

VWL - Finanzwissenschaft



1 Introduction

2 Body
2.1 Characteristics of Public Goods
2.2 Public Goods Problems as Prisoner’s Dilemmas
2.3 Assurance Contracts
2.4 Market solutions for Public Goods

3 Conclusion


1 Introduction

Every time when people try to work together one big problem comes out, to be specific of getting them to do their share of the work. Public goods are known as common works and market failures in classical economical theories, means that the market cannot provide them, so the conventional view postulates that only governments should and mostly can provide public goods.

Public goods are consumed collectively like national defence, public transport or public education. Many economists argue that central planning and bureaucratic is necessary to produce public goods. Especially Socialists argue that the government do a better job of providing them. Libertarian legal theorists are opponents of the Socialists. They argue that markets can provide most if not all private goods for various reasons; some of them will be discussed in this paper and we will see, that the answer of the included question in the topic is as so often, between the two radical theories of Socialists and Libertarians.

This paper shall be an economical analysis of public goods, neither political nor social viewings of public goods are pillars of this work, but in the hole discussion about public goods there are necessary and for the party who should provide them.

2 Body

One of the most common conclusions in the economics and nevertheless in the macro economics is, that the size of the government should be shrink in full working-order, so in mostly all industrialized countries.

Particular the eventfully nineties has shown in the case of the former USSR that the planned economy isn’t the best way of organize the economy. Now the free market economy is coming under pressure, furthermore to come forward for solutions and to reduce the size of government by provide public goods.

2.1 Characteristics of Public Goods

Public goods consists two characteristics. There’re nonexcludable and nonrivalrous. Nonexcludable means that people get the benefits of a product without any payments. For example imagine only one men would buy pyrotechnical article to lighten the sky over Prague on New Year’s Eve and other people who didn’t share the costs with him could enjoy the light games without any payments. It is impossible to exclude them from seeing the firework. These people are so called “free rider”.

A public good is nonrivalrous means, using a public good by one individual doesn’t diminish the opportunity of other individuals to consume the good. The observer of the firework didn’t decline the light games in the sky of other people, may the lonely organizer of the one-man- firework will be very angry because he had higher costs than the others for the same show and that’s the problem why economists argue this person would never do this and only the state could arrange a public good by using his power to got the money from all bystanders, for instance by taxes.

2.2 The “free rider” Problem

“Free riders” are these people who got the benefit from a public good without any payments, for example the firework on the New years eve in Prague are paid by the Czech Government so indirect by the Czech inhabitants, but also visitors could enjoy the show without any payments.

“The marginal social benefit of the public good is the sum of it marginal utilities to each consumer, while the marginal social cost is the marginal private cost of anyone who chooses to pay for it.”1 In short words if some people didn’t pay this public good it’s more expansive for those how pay, because they end up paying for all. So if all people who saw the fireworkshow would pay for it, the show would be cheaper.

2.3 Public Goods Problems as Prisoner’s Dilemmas

For one person or just a few the costs of producing public goods are standing in a bad condition to the benefits for them, so that nobody had incentives to produce these public goods. The best example in this case is not the firework because it is not easy to determine the right size of it, means one rocket could satisfy one person for a small amount of money. We need a very important matter helpful for all people, for instance an adequate example like national defence. It’s not payable for one person and that’s the point why people have to work together to create a cost sharing arrangement.2


1 Shipman Alan, The Market Revolution and its Limits, London, 1999, Page 47

2 Schmidtz David, The limits of government: an essay on the public goods argument, Colorado 1991, page 57


ISBN (eBook)
532 KB
Institution / Hochschule
Univerzita Karlova v Praze
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Titel: Public Goods - Should they be always provided by the government?