Private goods are excludable and rival. Since private goods are excludable, they can be provided by markets—someone who doesn’t pay, doesn’t get; so there is an incentive to pay for and thus to produce these goods. Furthermore, since the goods are rival, excludability doesn’t result in inefficiency—in a competitive market the only people who will be excluded from consuming a private good are the people who are not willing to pay what it costs to produce the good, and that’s efficient.

Public goods are nonexcludable and nonrival. Since public goods are nonexcludable, it’s difficult to get people to pay for them voluntarily. Markets, therefore, will tend to underprovide public goods.

Public goods are also nonrival, which means that one person’s use doesn’t reduce the ability of another person to use the good. As a result, 7 billion people can be protected from an asteroid strike for the same cost as protecting 1 million people. Since public goods are nonrival, the losses from the failure to provide these goods can be especially large.

Let’s look at another public good, mosquito control. Mosquitoes are annoying insects. With the spread of the West Nile virus in the United States, they are also dangerous. Mosquitoes can be killed by spraying, but spraying just one house won’t do much good for its owners because mosquitoes from other areas will quickly repopulate any small region, so you have to spray a city or neighborhood. But who will pay to spray a city or neighborhood? If some people do pay, then many others are likely to free ride, sit back and enjoy the benefits without contributing to their share of the costs. Fewer mosquitoes mean fewer mosquitoes for everyone, not just those who pay for mosquito control. If a lot of people free ride, then mosquito control will be underprovided by the market even though it is a valuable good.

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The benefits of public goods provide an argument for taxation and government provision. By taxing everyone and producing the public good, government can make people better off. Many cities and counties, for example, pay for mosquito control from government tax revenues. National defense is another example of a public good that would be difficult to provide voluntarily but is provided by government.

It may seem paradoxical that people can be made better off by requiring them to do something that they would not choose to do voluntarily, but the paradox can be resolved. Imagine that there are a million people, all of whom want national defense, but none of whom chooses to voluntarily contribute to national defense because of the incentive to free ride. Now imagine that this group is offered the following plan: “The government will tax each of you and use the proceeds to pay for national defense but only if you all agree to the plan.” It’s quite possible that even though none contribute voluntarily, all will agree to be taxed, so long as everyone else is also taxed.

Of course, just because everyone can be made better off by taxation does not mean that everyone will be made better off. Some people want more national defense, some people want less, pacifists want none. So, taxation means that some people will be turned into forced riders, people who must contribute to the public good even though their benefits from the public good are low or even negative.

What quantity of the public good should the government produce? In principle, the government should produce the amount that maximizes consumer plus producer surplus or the total benefits of the public good minus the total costs. But, in practice, figuring this out is very difficult. The total benefit of a public good, for example, is the sum of the benefits to each individual. But some individuals value the public good more than others and there is no easy way to finding out exactly how much each person values the good.

We showed in Chapter 4 that (under certain conditions) a market automatically produces the quantity of a good that maximizes consumer plus producer surplus. We now know that one of the required conditions is that the good be a private good, a good that is rival and excludable. Unfortunately, no one has yet discovered a workable process that, as if guided by an “invisible hand,” produces optimal amounts of public goods.

Voting and other democratic procedures can help to produce information about the demand for public goods, but these processes are unlikely to work as well at providing the optimal amounts of public goods as do markets at providing the optimal amounts of private goods (see Chapter 20 for more). Thus, we have more confidence that the optimal amount of toothpaste is purchased every year ($2.3 billion worth in recent years) than the optimal amount of defense spending ($660 billion) or the optimal amount of asteroid deflection (close to $0). In some cases, we could get too much of the public good with many people being forced riders, and in other cases, we could get too little of the public good. Nevertheless, since markets are challenged to provide public goods, we are probably fortunate that government can provide public goods even if the method is imperfect.

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One final point about public goods: A public good is not defined as a good produced in the public sector. If the government started to produce jeans, for example, that does not make jeans a public good. The government does produce mail delivery even though mail delivery is not a public good. Similarly, asteroid deflection is a public good even though, as of yet, the government does not produce very much asteroid deflection.