Sometimes in a free market economy, which we defined earlier in the series as one that
is based on supply and demand rather than any kind of government control,
we need the government to provide certain goods and services that the marketplace cannot.
Take this publicly accessible bridge, for example. This bridge is a public good, or a shared good,
and it doesn’t make sense to force consumers to pay individually to use the bridge,
or to somehow prohibit those who didn’t pay from using the bridge. The bridge is for everyone,
and actually, it helps the overall economy. So how is the bridge paid for? Well, to simplify
the funding of government projects in the public interest, the government collects taxes. Citizens
of a society pay taxes to a government, and that government in turn takes some of that money to
build and maintain that bridge. Imagine the arguments and traffic congestion that would occur
if drivers who refused to pay to use the bridge were told they had to turn around and drive away.
With this bridge, as with most public goods, it is impractical to exclude nonpayers from its use.
Another characteristic that makes this bridge a public good is that any number of consumers can
use it without reducing the benefits to any one person using it. For the most part, increasing
the number of drivers on the bridge does not increase the cost of providing the bridge.
Public goods are paid for by what is known as the public sector.
Every other part of the economy is paid for by the private sector. The most common public goods
make up a nation’s infrastructure, or the basic facilities that are necessary for a society and
economy to function and grow efficiently. What should or shouldn’t be a public good
often leads to political debate. After all, whenever tax dollars are involved,
taxpayers generally want to see those tax dollars align with their own values and beliefs.
Generally, the following questions guide the debate about whether or not something should
be classified as a “public good”. Number one. Is the benefit to each individual greater if the good
remains private? Number two. Is the benefit to society greater if the good becomes public?
Take education, for example. To answer the first question, if education were exclusively private,
it’s possible that it would be run more efficiently, and many individuals might be
better off. But to answer the second question, it is important for any society to have an educated
populace, and the easiest way to achieve this is to guarantee a basic education for everyone,
so in a grander context it makes sense for education to be a public good.
One issue associated with public goods is called the “free-rider problem.” A free rider is someone
who is not willing to pay for a certain good or service, but still gets the benefit if it were
provided as a public good. Unlike consumers in a pure free market, free riders consume what they
don’t directly pay for. However, the free-rider problem is inevitable. For example, you likely
wouldn’t voluntarily pay money to build highways in a state you don’t live in. However, you could
still benefit from that state building a highway, as that highway would make it easier for trucking
companies to bring goods to your state. And if you were traveling somewhere across the country
and drove through that state, you would probably be quite happy to drive on its highways. The
free-rider problem predicts what would probably happen if the government stopped collecting taxes
to fund public goods. If it relied entirely on voluntary contributions instead, many citizens
would use the services but simply refuse to give money, and thus many public goods would
no longer be available due to lack of funding. The example of driving on a highway in another
state that you did not directly pay for is also known as an externality. An externality is an
economic side effect. It’s essentially a cost or benefit a third party receives. That third
party has no control over the creation of that cost or benefit. An externality can be both
positive or negative, and can come from either the production or consumption of a good or service.
Let’s go back to the bridge we started with. Positive externalities of that bridge being built
include aiding drivers in getting across the river, increasing tourism, creating construction
jobs which are filled by local workers, and increasing traffic to local businesses. However,
negative externalities of the bridge could include the increased traffic and construction
lowering the air quality in the area, the ecology of the river being altered leading to fish dying,
the bridge driving a local ferry company out of business, or even an increase in suicides.
Often when we think about negative externalities, we think of the private sector.
Think of a company dumping toxic waste into the ocean or some similar cliché.
However, many economists believe that the private sector generates positive externalities
more efficiently than the public sector can, and at a lower cost to taxpayers.
Whether private or public, positive externalities allow someone who did not purchase a good or
service to enjoy at least some of the benefits of that good. We will learn more about how
governments handle public goods and externalities when we begin to examine macroeconomics,
or the study of the economy as a whole. For now, let’s continue by examining the labor force.