episode 33 - public goods

What happens when you can't prevent people from consuming a commodity, even if they haven't paid for it? Who ends up providing these kinds of goods and services?

Category:

Education

Tags:

• economics
• marketfailure
• publicgoods
• market

[Qwerty4594]

What I don't understand is the free rider problem. How can there be such an issue when the government just pays for everything with the money collected through indirect taxation?

[mjmfoodie]

@Qwerty4594 The free rider problem exists in an unfettered market, which is the reason that the government has to step in -- to resolve the market failure.

[Houshalter]

You can use ostracism, insurance, assurance contracts, etc. There's no need to invoke a government. For example, company A can turn off the lighthouse until company B pays it's fair share.

[mjmfoodie]

@Houshalter How many ships does Company A lose while the lighthouse is off?

[Houshalter]

@mjmfoodie If company B is rational in the first place, they won't have to turn it off. Most the time public goods are a problem because no one is paying for them in the first place, and usually it's not rational for anyone to do so on their own either.

[mjmfoodie]

@Houshalter Sounds like we agree it's a market failure because the product will be underproduced, or not at all... and I do agree that in some cases such failures can be resolved without gov't (look at public radio/public television -- the gov't is pulling support for those entities, so they must figure out other ways to survive), but it is also the case that often the gov't is the provider of public goods, because no one wants to step up and say, "yes, let me take care of that..."

[Houshalter]

@yankee6161 "Since public goods are non-exclusionary it's impossible to prevent someone who hasn't paid from consuming the good." Yes it is, it just means you have to turn the service off for everyone. When Consumer B comes along and starts free-riding, Consumer A can threaten to stop the service off. Of course A would suffer, but B would to, so they both have an incentive to come to an agreement so they receive the service.

[yankee6161]

@Houshalter

Houshalter said "It suddenly becomes in everyone's rational self interest to pay because doing otherwise would mean not receiving the service."

NO! Since public goods are non-exclusionary it's impossible to prevent someone who hasn't paid from consuming the good. Consumer A has signed a contract to use a service, but the service is non-exclusionary so Consumer B comes along and uses it without paying. Why would consumer A extend his contract when Consumer B is free-riding?

[Qwerty4594]

@mjmfoodie Ohh so the taxation is a solution?

[Houshalter]

@mjmfoodie That's not what I meant. If everyone signs a contract agreeing they will pay for their share if everyone else or almost everyone else does the same, then it can be resolved fine without coercion. It suddenly becomes in everyone's rational self interest to pay because doing otherwise would mean not receiving the service.