International political economy - module 1

PUBLIC GOODS

Market Failure: public goods

The next topic will be another of the reasons for market failure and very important for economical international relationships, which is public good. In many cases there is a lot of overlap between externalities and public good, as there are some cases in which you can think about the same problem as being an externality or as being a public good, depending on how you define the problem, e.g. a lake can be seen as a problem of negative externality for the society if a firm produces something that pollutes the water, or as public good in case of clear water that society enjoys.

Public good is a typical example of good that is not produced efficiently in a free market, but what defines a public good?

Fundamentally, there are two main features that describe a public good:

1. The first is called non-rivalry and the idea is that the good is provided everyone can enjoy it without further costs or loss of availability for other agents. So, the intuition

One individual that owns the good to prevent other people from enjoying that good. This is something that is not self-stoned, but it depends on the political system or law system, so it can evolve over time.

E.g. if a public road is so, then there is nobody who can prevent me from enjoying the utility of the light, so if I decide to walk by, no-one could tell me anything as the light is on a public road. Even though the light was to come from a private garden, the owner of that garden could not prevent people from passing by.

Sure there are examples of non-excludability, such as technology changes.

What are the keys of these two characteristics?

First of all, non-rivalry implies that individuals when deciding how much to consume or to produce of this good, they do not internalise the benefit that is given to other agents → e.g. the owner of the garden, that is providing with light the public road, decided to place the light considering just the cost of putting that light up, but he did not

There is a state that implements a law forcing them to pay. Example (non-excludability): the problem of lighthouses in England. The idea was that lighthouses were useful for the ships passing by (could be called a quintessential public good) as on one side it is non-excludable, as we cannot prevent a boat from enjoying the benefit of the light once it is on; on the other side, it is non-rival as it does not matter how many boats will pass on the sea, they all can enjoy the light in the same way.

But there is no massive free-riding about lighthouses, how is it possible? This is one of the things that started to kick in the thinking of Ronald Coase about how sometimes private contracts can solve the problem of market failure. At that time, the government was selling docking rights (it could be seen as a case of Coase's private contract), so if you wanted to have them, you had to build a harbour and people had to pay to dock in it, but at the same time, you had to build a lighthouse to avoid.

Having ships crashing in the harbour

Basically, by selling docking rights, England managed to ensure the provision of lighthouses in the early 19th century. So the lighthouse is a schoolbook example that might be useful to show how some of these goods of non-excludability are not set in stone, but they can change over time, for instance if the legal system changes, or if the property right system changes or if technology changes.

Nowadays, lighthouses are fully excludable goods as they do not work with light anymore, but with an encrypted radio signal and boats need to pay a fee to use it, while before lighthouses were fully non-excludable. This shows us as a change in technology can transform a good from fully NON-excludable to fully excludable.

Another example (non-excludability):

Tv broadcasting has always been a public good, that is why it has always been charged by the countries (e.g. canone rai) through a tax; but today we have digital tv, that can be encrypted, meaning that unless you paid,

you cannot enjoy the good (e.g. sky)

Example (non-rivalry): Non-rivalry usually does not change over time, unless due to crowding out problem, e.g. a public beach is a typical non-rival public good, which means that one extra person on the beach will not reduce my utility from enjoying it, but if we suppose that there is a million people on the beach, then it is no more true. It is not fully rival, but there is a certain positive degree of rivalry if an extra person comes in and he might take some part of the beach.

Types of Goods: If a good is fully rival and fully excludable, then it is a private good (e.g. the sandwich, as if I eat it, no-one else can and if I buy it, no-one else will have access to it). On the other hand there is the public good, which is perfectly non-rival, meaning that whoever comes by can enjoy it as for the lighthouse, and it is fully non excludable, which means that everybody can enjoy it. There are some other intermediate cases. There are goods that are non-excludable,

But there are goods that are rival to some extent (positive degree of rivalry), and they are usually called imperfect public goods or commons.

Then, there are goods that are excludable, but not rival, called club goods. For example, a concert in which the arrival of an extra person is not going to harm my utility, probably the contrary as I would enjoy it even more, so it is non-rivalry. However, it is excludable as they typically happen in halls, stadiums, or elsewhere, meaning that unless I pay to enter, I might not be able to enjoy it.

These are goods that have a future, so the problem is not that the good is not provided in the future as there are a lot of concerts, but that the people that are in the club may allow a level of participation to the good that is optimal. This means that when allowing an extra person to be part of the club, they will consider their own utility and not the one of the people that are entering (problem of property rights, meaning that there is someone who decides who is going to).

→ Club good: more a microeconomic than a macroeconomic area of interest.

Examples of public goods

• The Public or Private features of a good depends not only on its nature but also on the legal, institutional, and technological environment
• Knowledge: usually a Public Good. If patented, it becomes a Club Good
• A common grazing field is a 'common', but if it get enclosed with a fence it becomes a Private Good…

Some examples of public goods are all those goods which assume the characteristics said before; excludability can be changed with technology and legal action because a good can be public until the government decides to change.

Netflix allows more than one user on the same account, and all those users can use Netflix at the same moment. 90

One important public good is knowledge; general knowledge is the essential public good because everyone can have access to it without extra costs. In some cases, knowledge can become something similar to a private good,