Public goods are goods reported to have two distinct aspects: "nonexcludability" means that it is hard to exclude people of consumption of a good (the "free rider problem"); everyone will try to "free ride" by allowing others to pay for it and as a result the good will be unproduced, even if there is a strong demand for it. The second characteristic (considered by some less important) is "nonrivalrous consumption", when the good can be consumed without diminishing anyone else's enjoyment of it or increasing its cost. Because these goods will not be produced in a sufficient amount, or at all, they should be produced by the government.
There are numerous examples of public goods of varying acceptance, possibly the most widespread is national defense. "To the extent one person in a geographic area is defended from foreign attack or invasion, other people in that same area are likely defended also. This makes it hard to charge people for defense, which means that defense faces the classic free-rider problem. Indeed, almost all economists are convinced that the only way to provide a sufficient level of defense is to have government do it and fund defense with taxes."
There are several arguments against the public goods theory:
- there is no way of knowing what is the "optimal" amount of the good produced
- many other goods can be to some degree considered public with the imprecise definition
- the presence of the state changes the incentive structure. Companies may declare their product for a public good to receive taxpayer funding.
- many of the 'public goods' are successfully produced in the private sector
- the theory does not at all prove that the government should produce these goods
- many of the goods government actually does produce do not correspond to the economist's definition of public goods, so the theory poorly explains the government's actual role in the economy
Public goods on the seaEdit
National defense and lighthouses have been among the most frequently cited examples of public goods. In both cases, it is typically claimed that only a government can effectively provide them. However, maritime history, especially that concerning the age of sail, is rich with examples of privately supplied goods that today are often thought of as being "public".
Life at sea, especially in the days before steamships, radio, and radar, was remarkably close to life on the various land "frontiers". Governmental decrees often went unheeded, a high degree of self-reliance was taken for granted, reciprocal relations regarding benefits and responsibilities were the norm, and voluntary cooperation was very common. Perhaps above all, traditions provided a framework for solving problems and resolving disputes. Customary law, not authoritarian (or state-created) law, was normally the basis for conflict resolution.
One of the most instructive of all examples from maritime history is that of privateering, that is, the employment of profit-seeking, private armed ships during wartime. Privateers often had a significant, perhaps even deciding, impact on the course of wars between maritime nations. In Europe between 1600 and 1815, privateers "probably contributed much more than warships to the actual harm done the enemy". On the other side of the Atlantic, "without the presence of the American privateers in the Revolutionary War and the War of 1812, the United States would never have been able to hold off the British Navy".
Privateering disappeared precisely because it worked so well. It was effectively legislated out of existence in 1856 by means of the Declaration of Paris. The signatory nations wished to eliminate privateering, because it offered a low-cost but effective alternative to those nations who did not want to undertake the massive expenditures required by public navies. Privateering was not a market that can be shown to have ‘failed’.
The standard argument regarding lighthouses has been that, once the structure is built and as long as it is maintained, its service cannot be restricted only to those who pay for it. In short, there would be large numbers of "free riders". Therefore, private construction of lighthouses could never be profitable and must be a function of government. But, the building and operating of lighthouses by private firms and individuals was actually quite common. The owners of these structures gained their revenue from fees paid by shipowners, who benefited enormously from the service, so much so that they regularly petitioned the government to permit new lighthouses to be built. The lighthouses were built, operated, financed, and owned by private individuals, who could sell the lighthouse or dispose of it by bequest.
In the British Isles, the role of the government was limited to the establishment and enforcement of property rights in the lighthouses. Charters were dispensed to private entrepreneurs, who then charged fees for the service (a similar system worked in Canada). Not only did the British government often fail to initiate the building of needed lighthouses, it even resisted their construction on more than one occasion. By 1842 had the Parliament eliminated all private ownership of lighthouses. The shipowners, who paid the "light dues", lobbied for the change in the mistaken belief that it would result in smaller fees.
In the early United States, colonists frequently erected beacons and other aids for navigating the coasts. In 1789 Congress created the Lighthouse Establishment, which was given direct control over all coastal aids to navigation. But the new agency was burdened with bureaucratic problems, so little was accomplished until well into the nineteenth century, and of the existing lighthouses it has been said that they "failed in their primary purpose of guiding ships safely at night". At times, characteristics of existing lights have been changed without first informing the maritime community, sometimes with dire consequences. It was not until 1852 that the situation improved.
The old profession of piloting has been vital for maritime safety. Pilots, private suppliers who faced intense competition, would guide commercial vessels safely into and out of the port. The underwriters of marine insurance were often reluctant to insure vessels that did without a pilot altogether, or used a pilot whom the underwriters did not consider competent. Many took upon themselves the duties expected of the Coast Guard, helping ships in distress and rescuing passengers if they capsized. 
One typical and popular example of public goods is the case of dikes or levees. If a dike is built for one person, additional consumers can benefit from its services, i.e., protection from flooding. But once a dike has been built, no one living behind the dike can be excluded from its service, whether he participated in financing it or not. Hence, people would wait for others to build a dike hoping to enjoy it without having to pay for it. But when everyone waits, the dike that everyone needs is not built. This line of thinking ignores individual actions and motivations, and social pressures that may also come into play. People can decided to take the higher subjective risk or come to an agreement of sharing the burden.
Historically, as other public goods that allegedly need government provision, dikes have been built on the private market for a long time. In Germany, mainly in Frisia and Dithmarschen, the first dikes were built without any government help about 1,000 years ago. The population grew quickly in these very fertile areas made accessible by diking. As the population grew and became wealthier, monumental churches were built, symbolizing the success of private dike building. The newly diked areas were almost independent territories. Although they nominally formed part of the Holy Roman Empire, only in some cases were they required to support the army in case of war and pay taxes. They were autonomous with their own jurisdiction and diplomatic contacts. The land of the Fries was without a feudal order or without feudal overlords. Diking not only had the incentive to create new fertile and profitable land but also to create free land. Dikes were not only built without the state, but also can be regarded as seceding areas, that came close to private law societies.
- See also: Germany#Levees in Frisia
- ↑ Tyler Cowen. "Public Goods", The Concise Encyclopedia of Economics, referenced 2009-05-22.
- ↑ Art Carden. "A Few Notes on Public Goods", Mises Institute Blog, posted 2004-04-13, referenced 2009-05-22.
- ↑ Randall G. Holcombe. "A Theory of the Theory of Public Goods", Review of Austrian Economics 10, No. 1 (1997), Mises Institute, referenced 2009-05-22.
- ↑ Larry J. Sechrest. "Public goods and private solutions in maritime history", The Quarterly Journal of Austrian Economics Vol. 7, No. 2 (Summer 2004), referenced 2009-12-07.
- ↑ Philipp Bagus. "Wresting Land from the Sea: An Argument Against Public Goods Theory" (pdf, or html), Journal of Libertarian Studies Volume 20, No. 4 (Fall 2006): 21–40. Referenced 2010-10-07.
- A Theory of the Theory of Public Goods (pdf), Randall G. Holcombe.
- Fallacies of the Public Goods Theory and the Production of Security (pdf) by Hans-Hermann Hoppe
- Public Goods and Externalities: The Case of Roads (pdf) by Walter Block, 1983
- the Wikipedia page on public good theory
- the Econlib page on the same
- Pareto Optimality, External Benefits and Public Goods: A Subjectivist Approach by Barry P. Brownstein, Winter 1980