Principles of Microeconomics

The Definition Of Public Goods

Economists have a strict definition of a public good, and it does not necessarily
include all goods financed through taxes. To understand the defining characteristics
of a public good, first consider an ordinary private good, like a piece of pizza. A piece
of pizza can be bought and sold fairly easily because it is a separate and identifiable
item. However, public goods are not separate and identifiable in this way.

Instead, public goods have two defining characteristics: they are non-excludable and
non-rivalrous. The first characteristic, that a public good is non-excludable, means
that it is costly or impossible to exclude someone from using the good. If Larry buys
a private good like a piece of pizza, then he can exclude others, like Lorna, from
eating that pizza. However, if national defence is being provided, then it includes
everyone. Even if you strongly disagree with America’s defence policies or with the
level of defence spending, the national defence still protects you. You cannot choose
to be unprotected, and national defence cannot protect everyone else and exclude
you.

The second main characteristic of a public good is that it is non-rivalrous means that
when one person uses the public good, another person can also use it. With a
private good like pizza, if Max is eating the pizza, then Michelle cannot also eat it it—
the two people are rivals in consumption. With a public good like national defence,
Max’s consumption of national defence does not reduce the amount left for Michelle,
so they are non-rivalrous in this area.

A number of government services are examples of public goods. For instance, it

would not be easy to provide fire and police service so that some people in a
neighbourhood would be protected from the burning and burglary of their property,
while others would not be protected at all. Protecting some necessarily means
protecting others, too.

Positive externalities and public goods are closely related concepts. Public goods
have positive externalities, like police protection or public health funding. Not all
goods and services with positive externalities, however, are public goods.
Investments in education have huge positive spill overs but can be provided by a
private company. Private companies can invest in new inventions such as the Apple
iPad and reap profits that may not capture all of the social benefits.

National defence, according to the popular ideal, is a service provided by the state to
its citizens. It entails protection from aggressors or attacker from outside the state's
jurisdiction, usually foreign states. The most sophisticated theoretical justification for
government provision of this service is the public goods argument. Roughly stated,
this argument claims that the incentive to free ride inhibits people from providing
enough protection from foreign aggression voluntarily. Thus, it is in people's best
interests to coerce themselves. For a country to garner sufficient funding for military
expenditures taxation or a good tax system is necessary. From the tax obtain from
its citizen, the state can prepare its army with its armament in order to provide safety
and security for its citizen.

Many opponents of arms control treat the public goods problem as if it alone were
sufficient to discredit any radical reduction in military spending. We, however, will
challenge this presumption. The core service of national defence is to provide safety
and security from violence and aggression and to capture the essence of a public
good more fully than the economists have appreciated. But in this essential feature,
rather than providing a solid justification for heavy military expenditures, offers one of
the most powerful objections to such a government policy.

If we re-examine the nature of national defence in order to clarify the underlying goal
of military spending. The presumption that the state's military establishment
automatically provides safety from aggression needs careful scrutiny. The taxation
necessary to fuel military expansion often generates more public goods problems
rather than it circumvents. This leads us to the more general question of how the free
rider incentive is ever overcome, despite theoretical predictions to the contrary.
Public goods theory seems to be misunderstood by human nature, by exaggerating
the importance of narrow self-interest and confining attention to artificially static
Prisoners' Dilemmas. A more social and dynamic model of human action is better in
enabling the fact that free rider problems are overcome in the real world all the time.
Characteristic of National Defence as Public Good

Before we can explore the free rider dynamics of the state's military establishment,
we must clarify the meaning of the term "national defence." The public goods
justification for military expenditures rests upon a fundamental equivocation over
exactly what service national defence entails. When economists discuss national
defence, the core service they usually have in mind, explicitly or implicitly, is the
protection of people's lives, property, and liberty from foreign aggressors. This also
appears to be what people have in mind when they fear foreign conquest,
particularly in the case of the American fear of Soviet conquest. People throughout
the world believe that their own government, no matter how disagreeable, defends
them from foreign governments, which they think would be even more oppressive.

This defense of the people is not synonymous with another service that goes under
the same "national defense" label: protection of the state itself and its territorial
integrity. Historically, the state has often embarked on military adventures unrelated
to the defense of its subjects. If this were not the case, people would require no
protection from foreign states in the first p lace. Many Americans seriously doubt that
the U.S. bombing of North Vietnam and Cambodia had very much to do with
protecting their liberty. One defense-budget analyst, Earl Ravena, contends that
nearly two-thirds of U.S. military expenditures goes toward the defense of wealthy
allied nations in Europe and Asia and has little value for the defense of Americans.

The distinction between the two meanings of national defense does not apply only
when the state engages in foreign intervention or conquest. Even during
unambiguously defensive wars, the state often systematically sacrifices the defense
of its subjects to the defense of itself. Such universal war measures as conscription,
confiscatory taxation, rigid economic regulation, and suppression of dissent aggress
against the very citizens whom the state is presumably protecting.

People believe that the state defends their liberty or in fact many end up
surrendering much of their liberty to defend the state. People of course may consider
some trade off worth it. They may accept the costs and risks of the state's protection
in order to reduce the risks and costs of foreign conquest. But in most discussions of
national defence, the aggressive acts taken by the government against its own
subjects are arbitrarily excluded from the discussion. It is this frequently overlooked
cost which is suggested in Randolph Bourne's famous observation: "War is the
health of the State”.

In other words, the national interest and the public good do not automatically
coincide with each other. We do not deny the possibility of an incidental relationship
between the defense of the state and the defense of the people. But in the next
section, we will present general reasons why we think this relationship is not as
strong as usually supposed. Before we can do that, we must fully expose the
conceptual gulf between the two meanings of national defense. The pervasive
doctrine of nationalism obscures this fundamental distinction.

Nationalism treats nations as collective entities, applying principles drawn from the
analysis of individual interaction to the international level. In a war between two
nations, the nationalist model focuses on essentially two parties: nation A and nation
B. As in fights between individuals, one of these two nations is the aggressor,
whereas the other is the defender. As a result, the model axiomatically equates
protecting the state with protecting its subjects.

The basic flaw in the nationalist model is its collectivist premise. Although the model
informs many of the formal economic analyses of international relations, it represents
a glaring example of the fallacy of composition. The state simply is not the same
thing as its subjects. Democracies are sometimes referred to as "governments of the
people," but this is, at best, rhetorical sloppiness. The state and the people
interpenetrate one another and in complex ways, but they clearly do not have exactly
the same purposes or interests. Consequently, any conflict between two nations
involves not just two parties, but at least four the state governing nation A, the state
governing nation B, the people with the fortune or misfortunate to live under state A,
and the people with the fortune to live under state B. Whatever the merits of a
dispute between states A and B, the dispute need not divide a significant portion of
people A from people B.

Abandoning this collectivist identification of the State with its subjects exposes the
critical insight about the national defence service. If one is truly concerned about
defence of peoples' lives, property, and liberty, then the transfer of their capital city
from one location to another is not intrinsically significant. In some cases it might
even be thought an improvement. Many Americans are convinced that the territory
constituting Russia is in a very real sense already conquered - by the Soviet
government. Some even believe that the Soviet people would fare better with
Washington, D.C., as their capital city. What ultimately matters is whether
transferring the capital city brings the citizens a net loss or gain.

National defence is a non-excludable good that someone does not pay for, or can
avoid paying for in order for him to use or consume. It is said to be highly difficult or
costly to exclude such an individual from having access to it even though he’s not
paying for it. Thus, such an individual can benefit from its supply without having paid
anything to cover some portion of its production costs in making it available on the
market.

The standard example given is national defense. A “defense shield” of military

aircraft, missiles, and naval ships protect large portions of the United States from
foreign attack. Such a military shield provides protection not only to the citizens who
may have contributed to pay for it but all others who may not have contributed to
cover its costs but who live under its protection.

If Pierre is visiting from France, for the time he is in the U.S. that defense shield
protects him from any potential foreign military attack, though the American
taxpayers have paid the costs of providing it to themselves and to Pierre. There is no
way to exclude Pierre from that protection in case of foreign attack. A hole cannot be
left in the defense umbrella in the sky into which an incoming missile can vaporize
poor Pierre but no one else who has helped pays for the system.

Non-rivalrous consumption refers to the idea that the number of those who benefit
from the use or enjoyment of such a public good does not necessarily affect the cost
of providing it. For instance, an increase in, say, an extra 10,000 people living in the
United States does not impact the marginal cost of providing that defense shield to
that addition to the country’s population.
If people are watching a fireworks display in a large open field on the fourth of July,
an extra person standing in the field enjoying the display does not impact the cost of
supplying the fireworks or the launcher equipment, given the planned size of the
display. Assuming a relatively large field with unimpeded vision of the sky, whether
twenty people are watching the illuminations or two hundred does not influence the
cost of providing the holiday entertainment to the viewers.

National defense is in many ways a public, or “collective,” good, which means two
things. First, consumption of the good by one person does not reduce the amount
available for others to consume. Thus, all people in a nation must “consume” the
same amount of national defense (the defense policies implemented by the
government), although different people may value that common defense policy
differently. Second, the benefits that a given person derives from the provision of a
collective good do not depend on that individual’s contribution to funding it. Everyone
benefits, including those who pay little or no taxes.

To say that everyone gains from defense is not to say that everyone gains from
government expenditures that are labeled “defense.” There is no necessary
connection between defense expenditures and actual improvements in protection
from foreign threats. Some defense expenditures may not contribute to such security
at all; some expenditure may contribute a great deal; and some expenditure may, by
stirring up hornets’ nests, actually reduce security.

National defence, like other public good has an important free rider problem. This is
because people will benefit whether or not they contribute toward defence or not.
Each person has a chance or an incentive to wait for others to provide the collective
defence goods and thus hope to get a free ride in the national defence. This is also
the reason for free rider to go free from their obligation to the national defence
because free rider consumption does not reduce the amount of defence that are
available for other to consume or use. There are also others that pay a little incentive
to prevent free riding by others.
As a result of such free riding, individuals acting privately to provide national defence
services would produce too little from the standpoint of society as a whole. Each
person would provide defence until the incremental benefits to him equalled the
incremental costs. But for society as a whole and that is, for all individuals
collectively. The incremental benefits would exceed the incremental costs, precisely
because once an individual provides some of the collective good, all people benefit
from it and no one can be excluded. This free-rider behaviour yields one of the
important traditional arguments for government: By imposing taxes on all individuals
and then providing collective goods, government, in principle, can eliminate free rider
behaviour and produce the “correct” amount of national defense and other collective
goods for the good of the people.

Limited government classical liberals since the time of Adam Smith have taken for
granted that such things as “national defense,” “police,” and the “justice system” are
examples of public goods for which government funding by compulsory taxation is
essential.

A primary reason, it is argued, is that, otherwise, there is created a “free rider”

problem, the result of which is an “undersupplying” or less-than-optimal production of
defense, police, or justice. Suppose that there are 100 million people in a country,
but payment for national defense is a matter of voluntary contribution by the citizens.
Since a resident of the country is not forced to pay for being militarily protected from
a foreign attack, he might conclude that he won’t send in a voluntary contribution
and, yet, enjoy whatever degree of funded national defense ends up being supplied;
after all, he can’t be excluded from its production though he will not have contributed
to its provision.

Furthermore, suppose that each citizen is asked to pay a voluntary contribution of

$100, and 75 million of them actually send in that sum, resulting in the government
having $7.5 billion to spend on national defense. If the remaining 25 million citizens
had not decided to free-ride on the contributions of the others and had also sent in
respective $100 contributions, the government would have had an additional $2.5
billion for defense spending for a total of $10 billion. It is argued that this shortfall
reflects and measures the degree to which there has been an undersupply of
national defense in that country.
In order to reduce free riding among the citizen, the government need to be induced
to provide the optimal amount of national defense. This can be done by achieving
efficiency in the allocation of resources. Just as economists have shown that
individuals acting alone have incentives to provide too few collective goods, public
choice economists have shown that a democratic government acting under a
majority decision rule, also has an incentive to provide too few collective goods. The
reason is that the political majority can impose taxes on all citizens and then reduce
spending on collective goods, such as national defense, while increasing spending
on private i.e. noncollective goods that benefit the majority but not the minority. Such
transfer programs as social security and agricultural subsidies are examples of
government spending on private goods.

However, if the collective goods that government provides can be transformed into
private ones where if the provision of collective goods yields ancillary benefits that
some majority coalition of voters views as particularly beneficial to them, then the
problem of governmental underprovision of collective goods can be at least partially
offset. National defense spending does yield such ancillary benefits to special
interests; defense contractors, defense-related workers, and communities with
military bases are examples.

References

Cowen, Tyler (December 2007). David R. Henderson (ed.). The Concise

Encyclopedia Of Economics. Public Goods. The Library of Economics and Liberty.

Furusawa, Konishi, T, H (2011). Contributing or free riding? Voluntary

participationing public good economy. Theoretical Economics. 6 (2): 219–256

Brown, C. V.; Jackson, P. M. (1986), "The Economic Analysis of Public Goods",

Public Sector Economics, 3rd Edition, pp. 48–79.

Ray Powell (June 2008). "10: Private goods, public goods and externalities". AQA
AS Economics. Philip Allan. p. 352.
Kingma, Bruce R. (2003), Anheier, Helmut K.; Ben-Ner, Avner (eds.), Public Goods
of the Nonprofit Sector, The Study of the Nonprofit Enterprise: Theories and
Approaches, Nonprofit and Civil Society Studies, Boston, MA: Springer US, pp. 53–
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