A framework for classifying public goods

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Public goods and the absence of markets

A public good has two critical properties, it is both non-excludable and non-rivalrous in consumption (Boardman, et al., 2011). A good is non-excludable if when provided, it is difficult or even impossible to exclude an individual from enjoying the good. Non-rivalrous in consumption means that one individual’s enjoyment of the good does not detract from that of another, nor does it reduce the good’s availability to others. In general, these properties lead to free-rider problems which deter private firms from supplying public goods, creating an absence of private markets. Consequently, pure public goods are rare and usually require public-funding or government provisioning. Commonly cited examples include national defence, lighthouses, and free-to-air public radio.

The need for a framework that classifies goods

Economics text-books such as Boardman’s (2011) provide a clear and consistent definition for public goods, however academic literature is sparse on representing these definitions as an interpretable framework. To support my economic analysis, I have translated the stated definitions of public goods into a clear framework that better enables the classification of goods. This framework is made up of two tests that establish non-excludability and non-rivalry.

Establishing non-excludability

While it is almost always possible to conceive of a way to exclude someone from enjoying a good, sometimes such exclusion can be irrational or impractical. A determining factor therefore, must be the rational practicality of exclusion.

A method for determining non-excludability is as follows:

i. Determine all possible modes of exclusion. “Modes of exclusion" refers to plausible means of making it difficult or impossible for an individual to enjoy a good. These depend on the nature of the good and how it is enjoyed.

ii. Determine the rational practicality of each mode of exclusion. Practicality may be constrained by several factors including costs, regulation, or even physically viability. It is important to determine if the modes discussed are practical on rational grounds.

iii. Analyse and decide. Only if all modes of exclusion are found to be rationally impractical, can a good be regarded as non-excludable.

This method can be further explained by way of example: you could conceivably exclude someone from enjoying a public display of fireworks, by building a large wall around them or forcibly removing them from the vicinity of the display – these are two possible modes of exclusion. However, the construction costs of an effective wall may be prohibitive and irrational. Additionally, laws may restrict the forced removal of individuals from public spaces. Together, these render the selected modes of exclusion rationally impractical. In this instance therefore, a public display of fireworks would be regarded as non-excludable.

Establishing non-rivalrous consumption

When an individual’s consumption of a good detracts from that of another’s, the materiality of that effect should be used to determine if a good is non-rivalrous in consumption.

A method for determining non-rivalry in consumption is as follows:

i. Determine all sources of rivalry in consumption. These typically stem from the need to share some fixed-size or scarce resource.

ii. Determine all points-of-congestion. A “point-of-congestion" is the point at which the marginal rivalry created by an additional consumer, materially detracts or restricts availability or enjoyment for existing or future consumers.

iii. Determine if any point-of-congestion is reasonably likely, or even realistic. We can use a point-of-congestion’s likelihood to determine if it warrants consideration.

iv. Analyse and decide. Only if all points-of-congestion are found to be considerably unlikely, can a good be regarded as non-rivalrous in consumption.

This method can be further explained by way of example: network bandwidth may be a source of rivalry for internet users, as it is limited by physical infrastructure. With a large enough user-base, it is conceivable to reach a point-of-congestion where crowding-induced latency detracts from the enjoyment of the good for existing and future users. However, such a point is typically accounted for through exclusion measures (e.g. access fees) and is unlikely on large-scale public infrastructure. Consequently, one additional person’s ability to enjoy access to the internet does not materially detract nor reduce availability for others. Although excludable by access fees, internet access can be regarded as non-rivalrous in consumption once provided, a view further shared by the World Bank (2016).

Quasi-public goods

Quasi-public goods exhibit only one of the two critical properties of non-excludability and non-rivalry. Goods that are solely non-excludable are referred to as Common Goods. Examples of Common Goods include fish stocks and water from a river. Whereas goods that are solely non-rivalrous are referred to as Club Goods. Examples of Club Goods include internet access and private parks.

Excludable Non-Excludable
Rivalrous Private/Normal Goods Common Goods
Non-Rivalrous Club Goods Public Goods

References

Boardman, A. E., Greenberg, D. H., Vining, A. R. & Weimer, D. L., 2011. Cost-Benefit Analysis: Concepts and practice. 4th Edition ed. s.l.:Prentice Hall.

World Bank, 2016. World Development Report 2016: Digital Dividends, Washington: International Bank for Reconstruction and Development / The World Bank