Skip to main content

Defining a public good: don’t forget the production side

Ask any self-respecting economics graduate the definition of a public good and they will tell you the answer: it is a good that is non-excludable and non-rivalrous. Which means that once it is provided everybody gets to consume it, and that one person’s consumption of the good does not detract from another person’s enjoyment of it. Simple enough, one might think. But, I sense a lot of disagreement about the nature of public goods. For example, I presented a paper recently on step-level public goods, and the audience was keen to dispute that a step-level public good ‘really is’ a public good. So, what’s the problem?
   The definition of a public good only tells us about the consumption side. It leaves a complete blank as to how the public good will be produced. And this is where the differences start to surface. To most economists, if you say public good, the picture that first comes to mind is of a smooth linear or concave production function; the more people contribute towards the public good the more is produced. To most psychologists, if you say public good, the picture that comes to mind is seemingly of a step level production function; contributions need to reach particular thresholds to provide the good. We need not stop with these two examples. One can have a minimum-effort production function in which the quantity of the public good is determined by the minimum contribution. Or, one could have a best-shot production function in which quantity is determined by the largest contribution.
   How a good is produced is irrelevant in determining whether or not it is a public good. So, if people have a picture of what the production function of a public good ‘should be like’ we get a source of confusion and disagreement. The problem, however, is a little bit deeper than this. If the production function is smooth then the public good is underprovided by the market. If the production function is of the step-level, minimum effort or best-shot type then the public good can be efficiently provided by the market.  Economists are educated that public goods are underprovided by the market; hence it is natural for them to associate public goods with smooth production functions. Psychologists focus more on the coordination aspect of providing public goods; hence it is natural for them to associate public goods with step-level production functions. The confusion and disagreement is not, therefore, just about production functions, its also about whether markets can provide public goods efficiently.  
   This is worth keeping in mind when looking at public goods. Economists, for instance, are almost certainly biased towards thinking public goods cannot be provided by the market. Many public goods are, however, provided by the market. It is crucial, therefore, to also think about how public goods are produced.

Comments

Post a Comment

Popular posts from this blog

Honesty around the world

In my last post I looked at dishonesty in the banking industry. Sticking with a similar theme, this time I will at dishonesty across different countries.        Let us start with a study by David Pascual-Ezama and a long list of co-authors on 'Context dependent cheating: Experimental evidence from 16 countries'. They asked 90 students in 16 different countries to perform a very simple task: toss a black and white coin and record the outcome. If the coin came up white the student obtained a red Lindt Lindor Truffle. If it came up black they got nothing. Crucially, the coin toss took place in private and so the student could report whatever outcome they wanted. If they wanted a chocolate then they simply had to report white. (The study contrasted three different methods of reporting - form put in a box, form given to the experimenter or verbally telling the experimenter - but I will skip those details here.)           The chart below summa...
Post a Comment
Read more

Prisoners dilemma or stag hunt

Over Christmas I had chance to read The Stag Hunt and the Evolution of Social Structure by Brian Skyrms. A nice read, very interesting and thought provoking. There’s a couple of things in the book that prompt further discussion. The one I want to focus on in this post is the distinction between the stag hunt game and the prisoners dilemma game.    To be sure what we are talking about, here is a specific version of both type of game. Adam and Eve independently need to decide whether to cooperate or defect. The payoff matrix details their payoff for any combination of choices, where the first number is the payoff of Adam and the second number the payoff of Eve. For example, in the Prisoners Dilemma, if Adam cooperates and Eve defects then Adam gets 65 and Eve gets 165. Prisoners Dilemma Eve Cooperate Defect Adam Cooperate 140, 140 65, 165 Defect 165,...
Post a Comment
Read more

Revealed preference, WARP, SARP and GARP

The basic idea behind revealed preference is incredibly simple: we try to infer something useful about a person's preferences by observing the choices they make. The topic, however, confuses many a student and academic alike, particularly when we get on to WARP, SARP and GARP. So, let us see if we can make some sense of it all.           In trying to explain revealed preference I want to draw on a  study  by James Andreoni and John Miller published in Econometrica . They look at people's willingness to share money with another person. Specifically subjects were given questions like:  Q1. Divide 60 tokens: Hold _____ at $1 each and Pass _____ at $1 each.  In this case there were 60 tokens to split and each token was worth $1. So, for example, if they held 40 tokens and passed 20 then they would get $40 and the other person $20. Consider another question: Q2. D...
Post a Comment
Read more