Public good
Based on Wikipedia: Public good
Here's a puzzle that has occupied economists for over a century: How do you get people to pay for something they can enjoy for free?
Street lighting is the classic example. Once a city installs lamps along its avenues, everyone benefits—the late-night jogger, the dog walker, the couple strolling home from dinner. You can't charge admission to walk under a streetlight, and one person standing in its glow doesn't prevent anyone else from doing the same. The light is just... there, for everyone.
This is what economists call a public good, and understanding it requires grasping two crucial properties that make these goods fundamentally different from the bread you buy at a bakery or the car sitting in your driveway.
The Two Properties That Change Everything
The first property is non-excludability. Once a public good exists, you cannot prevent people from using it. A fence can keep someone out of your backyard, but there's no fence around national defense. If a country maintains a military that deters invasion, every resident enjoys that protection whether they've paid taxes or not. You can't selectively remove the security umbrella from above a tax evader's house.
The second property is non-rivalry. My consumption doesn't reduce yours. When you eat an apple, I cannot eat that same apple—we are rivals for it. But when you listen to a radio broadcast, you haven't consumed the signal or diminished it in any way. A million other listeners can tune in simultaneously without any degradation.
These two properties together create a category of goods that markets handle very badly, which is why governments typically step in to provide them.
The Free Rider Problem
Imagine your neighborhood decides it needs better flood control. A levy system would protect everyone's homes, and collectively, the neighbors value this protection at far more than it would cost to build. Economically, the project makes perfect sense.
But here's the catch. If your neighbor pays to build the levy, your house gets protected anyway. And if you pay while your neighbor doesn't? Your house is protected, but so is theirs. The rational move—the purely self-interested calculation—is to let everyone else foot the bill while you enjoy the benefits for free.
Of course, everyone in the neighborhood is making this same calculation.
This is the free rider problem, and it explains why public goods tend to be underprovided by voluntary action alone. Even when everyone genuinely wants the good and would happily pay their fair share, each person has an incentive to hold back and hope others will carry the load.
The economist Paul Samuelson formalized this insight in 1954, building on earlier work by Swedish economists Knut Wicksell and Erik Lindahl. Samuelson called public goods "collective consumption goods"—things that "all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption."
The definition sounds abstract. The consequences are concrete: without some mechanism to overcome free riding, societies would have far fewer lighthouses, much weaker national defense, and streets that go dark after sunset.
A Tour of Public Goods
The range of public goods is broader than you might expect.
Knowledge is perhaps the purest example. Once someone discovers that a particular plant cures a disease, that information can spread to every human on Earth without ever "running out." Your learning doesn't diminish mine. Mathematical theorems, scientific principles, historical facts—these are infinitely shareable.
Official statistics work similarly. When a government publishes census data or unemployment figures, anyone can use those numbers for research, business planning, or journalism without reducing their availability to others.
National security protects everyone within a country's borders equally. Whether you're a billionaire or homeless, if a nuclear deterrent prevents an attack, you've benefited. The protection cannot be withdrawn from individuals.
Common languages represent an interesting case. English is a public good in the sense that my speaking it doesn't prevent you from speaking it, and no one can exclude you from learning it. The more people who speak a language, the more valuable it becomes to each speaker—a phenomenon economists call a network effect.
Law enforcement maintains order that everyone enjoys. Even if you never personally call the police, you benefit from the general deterrence of crime that their presence creates.
Flood control systems, navigation aids, broadcast radio and television—these all share the fundamental characteristics. Use them freely; your neighbor's use takes nothing from you.
The Opposite: Private Goods
To truly understand public goods, consider their opposite. A loaf of bread is excludable—the baker can refuse to sell it to you. And it's rivalrous—once someone eats it, that bread is gone. These two properties make bread a private good, and markets handle private goods exceptionally well. Prices balance supply and demand. Profits reward producers who satisfy consumers. No elaborate government intervention required.
Most things we buy are private goods. Your car, your clothing, your lunch, the book on your nightstand. Each can be withheld from you if you don't pay, and each is consumed when you use it.
The trouble with public goods is that the normal market mechanisms break down. Why pay for something you'll receive anyway? And how can a business profit from selling something that buyers can simply take for free?
The In-Between Cases
Reality rarely sorts itself into neat categories, and goods exist on a spectrum between purely public and purely private.
Common-pool resources are non-excludable but rivalrous. Think of fish in the open ocean. No one can stop you from fishing international waters, but if too many boats take too many fish, the stocks collapse. Here the problem isn't free riding—it's the opposite, what ecologists call the "tragedy of the commons." Instead of underuse, you get overuse. Instead of underproduction, you get depletion.
Club goods flip the equation: they're excludable but non-rivalrous. A private park with a membership fee lets members enjoy the grounds without crowding each other out. Satellite television requires a decoder, but the signal itself isn't diminished by multiple viewers. Netflix, streaming to millions simultaneously, excludes non-subscribers but doesn't get "used up" when you watch a show.
Mixed goods combine private and public elements in complicated ways. Consider a soccer field in a public park. The field itself is public—anyone can use it. But to actually play, you need cleats and a ball (private goods). And if the field gets too crowded, the quality of everyone's experience declines. Public and private intertwined.
How Do You Pay for Things People Won't Pay For?
Economists have spent considerable energy devising mechanisms to fund public goods efficiently. The solutions range from elegant theoretical constructs to practical, if imperfect, real-world implementations.
Taxation: The Lindahl Solution
In 1919, Swedish economist Erik Lindahl proposed a disarmingly simple idea: tax people according to how much they personally benefit from a public good. If you live in the flood plain, you should pay more for the levy. If you ship goods by sea, you should contribute more to the lighthouse. Each person pays in proportion to their marginal benefit.
The elegance is obvious. So is the problem: how do you measure marginal benefit? If I'll be taxed based on how much I value something, my incentive is to dramatically understate my interest. "Flood protection? Never really think about it. Wouldn't pay a dime." Meanwhile, I'm secretly relieved that my riverside property won't wash away.
Lindahl taxes work beautifully in theory and almost nowhere in practice.
The VCG Mechanism: Truth Through Incentives
Named after economists William Vickrey, Edward Clarke, and Theodore Groves, the Vickrey-Clarke-Groves mechanism represents one of the most carefully studied approaches to funding public goods. The technical details are complex, but the core insight is that you can design payment rules that make telling the truth each person's best strategy.
Under VCG rules, if your stated preferences change the outcome—if your vote is the deciding one—you pay the cost your decision imposes on others. This creates incentives for honest revelation of preferences rather than strategic misrepresentation.
The catch? VCG mechanisms require people to report detailed information about their preferences across many possible funding levels. In practice, most of us have only a vague sense of how much we'd value slightly more or less of any given public good. The information burden makes VCG impractical for most real applications, though it remains a cornerstone of mechanism design theory.
Quadratic Funding: The Crypto-Era Innovation
Among the newest entries in this field is quadratic funding, developed by Vitalik Buterin (creator of Ethereum), Zoë Hitzig, and Glen Weyl. The mechanism has roots in an earlier idea called quadratic voting, adapted for funding rather than elections.
The mathematics work like this: each person contributes whatever amount they choose. The total funding for the project equals the sum of the square roots of individual contributions, squared. If three people give $1, $4, and $9, you don't simply add to get $14. Instead, you take the square roots (1, 2, and 3), sum them (6), and square the result (36). A matching fund covers the difference between what people gave and the calculated total.
Why square roots? The mechanism ensures that many small contributions generate more matching funds than a few large ones. This guards against wealthy individuals dominating public goods decisions while still allowing anyone to contribute.
Quadratic funding has seen real-world implementation in cryptocurrency communities, where it funds open-source software development. It requires subsidies to work, and it's vulnerable to collusion—contributors might coordinate to inflate their project's matching funds. But it represents a genuine innovation in a field that doesn't see many.
Assurance Contracts: All or Nothing
Here's a clever approach first formalized by economists Mark Bagnoli and Barton Lipman in 1989: make contributions conditional. Everyone pledges money toward a public good, but the pledges only count if enough people participate to actually produce the good. Fall short of the threshold, and everyone gets their money back.
This eliminates a major barrier to voluntary public goods funding. You no longer have to worry that your contribution will be wasted if others don't participate. Your money is only spent if the project succeeds.
If this sounds familiar, you've probably used Kickstarter. Crowdfunding platforms apply exactly this logic—projects must hit their funding targets or no one pays. The mechanism works well for goods with clear production thresholds and identifiable participant groups.
Economist Alex Tabarrok proposed an enhancement called the dominant assurance contract. In his version, if the funding threshold isn't met, contributors don't just get their money back—they receive a bonus. Perhaps everyone gets an extra $5 on top of their returned pledge. This changes the calculation: even if you doubt the project will succeed, participating becomes attractive because failure pays a premium.
Lotteries: An Ancient Method
Long before economists developed formal theories, societies were funding public goods through lotteries. The approach is remarkably simple and surprisingly effective.
A lottery offers a cash prize funded by some external source—a government treasury, a wealthy patron, whatever. People buy tickets, knowing that the proceeds beyond the prize money will fund some public benefit. Someone wins the jackpot; everyone else loses their ticket price but gains the public good.
Why does this work? Because people value lottery tickets beyond their expected monetary return. The fantasy of winning, the entertainment value, the social experience of participation—these all contribute to ticket sales exceeding what pure economic calculation would predict.
Research by economist John Morgan established the theoretical foundations for lotteries as public goods mechanisms. The approach isn't perfect—it requires subsidies, and in very large populations the advantages over simple voluntary giving shrink. But lotteries have funded everything from the British Museum to the construction of Harvard's campus to modern state education budgets.
When Goods Cross Borders
Some public goods don't respect national boundaries. These global public goods present even thornier problems than their domestic cousins.
Climate stability is perhaps the most discussed example. If one country reduces carbon emissions, the entire planet benefits. But that country bears the full cost while capturing only a fraction of the gain. The incentive to free ride is overwhelming—let other nations sacrifice while you continue developing.
Disease surveillance works similarly. When one country detects and reports a new pathogen, it protects populations worldwide. But reporting can damage tourism and trade, creating incentives to cover up outbreaks rather than disclose them honestly.
Scientific knowledge, once published, flows freely across borders. Financial stability, when maintained, calms markets everywhere. Peace in one region reduces refugee flows and security threats in many others.
The mechanisms that handle domestic public goods—primarily taxation and government provision—don't translate easily to the global level. There is no world government to tax citizens and provide global public goods. International agreements must substitute, with their attendant problems of enforcement, free riding, and negotiating among parties with vastly different interests.
The Nonprofit Solution
Governments aren't the only institutions that provide public goods. Nonprofits fill gaps that government provision leaves empty.
In a model developed by economist Burton Weisbrod, government satisfies the demands of the median voter. But citizens aren't uniform. Some want more of a public good than the median voter demands; others want less. Those who want more can't simply buy additional units the way they would with private goods—you can't purchase extra national defense for yourself alone.
Nonprofits emerge to satisfy this unmet demand. Environmental groups fund conservation beyond government programs. Private foundations support basic research that public science budgets don't cover. Charitable organizations provide social services in communities where government provision falls short.
The nonprofit sector serves as a kind of overflow valve, capturing demand for public goods that democratic institutions, oriented toward the median preference, cannot satisfy.
A Field of Genuine Debate
Not all economists accept the public goods framework uncritically. Steven Shavell has argued that "public goods" may not constitute a coherent category at all—that each apparent public goods problem has its own particular characteristics requiring its own particular solution, rather than representing instances of a general phenomenon amenable to general remedies.
The boundaries between categories blur constantly. Technology transforms excludability. Encrypted broadcasts turned over-the-air television from a pure public good into a club good. Digital rights management attempts the same transformation for music and video. Knowledge that once flowed freely can be locked behind paywalls and patents.
Meanwhile, goods once thought firmly private can become public. Open-source software deliberately creates non-excludable, non-rivalrous digital tools. Wikipedia offers knowledge without restriction. Creative Commons licenses let creators grant public access to works they could have kept private.
The categories matter less than the underlying reality: some goods are hard to fund through markets because people can enjoy them without paying. Understanding when this problem arises—and what might be done about it—remains as important as when Samuelson first put equations to the intuition seventy years ago.
Why This Matters
The theory of public goods isn't merely academic. It shapes how societies organize themselves.
It explains why lighthouses were historically government-operated while bakeries were not. It illuminates debates over whether healthcare and education should be publicly provided or left to markets. It underlies arguments about climate policy, infrastructure investment, and the funding of basic research.
Every time someone asks "Why doesn't the market provide this?" or "Why do my taxes pay for that?" they're brushing against questions that economists have formalized through the public goods framework.
The streetlight outside your window, the language you're reading this in, the legal system that protects your property, the scientific knowledge that powers your devices—all of these are, in one way or another, public goods. They exist because societies found ways, however imperfect, to overcome the free rider problem and provide things that individuals, acting alone, would never produce.