Bryan Caplan thinks we might be better off dropping “public goods” from undergrad econ classes, in favor of a broader discussion of externalities. And he’s got a point — most people do not understand what economists mean by “public good”.
A public good is a good which is nonexcludable (you can’t keep people from partaking in the benefits of its existance)Â and nonrival (my partaking in the good does not inferfere with yours). National defense is the classic example of a public good — it’s nonexcludable because you can’t turn off the national defense to my house if I don’t pay my Army bill, and it’s nonrival because keeping Russian paratroopers away from my house doesn’t interfere with keeping Russian paratroopers away from my neighbor’s house. Pizza is a classic example of a pure private good — it’s excludable (if you don’t pay for the pizza, you don’t get a slice) and it’s rival (each slice you eat is one fewer I can eat).
Public goods are interesting to economists because the market doesn’t handle them very well because of the nonexcludablity aspect —  I start up a National Defense Company, I’ll have a lot of problems getting people to pay their army bills because what am I going to do if they don’t pay — and the nonrival aspect works around a common problem with the government providing goods for free — free government pizza wouldn’t work because people would eat too much and we’d run out or have to spend a lot of money making more, but free national defense works fine because your consumption doesn’t interfere with mine. So even very free-market economists often favor government provision of public goods.
Government provision is not the only way to handle the public goods problem. Another way is to change what you’re selling to something that is excludable. Broadcast radio is a good example of a public good that the market has found a way to provide. You can’t sell the broadcast itself, because that goes everywhere. But you can sell advertising mixed in with the content, because you can refuse to run ads from people who don’t pay. And you can also encrypt the broadcast signal (as XM and Sirus do) and sell decryption devices.
Education is often described as a public good. It isn’t. You can throw out students who don’t pay their school bills (excludable), and there’s only so many people who can fit in the classroom (rival). Education does have positive externalities, but most of the benefit fo education fall on the students themselves.
The real problem with the concept of public goods is the name is misleading. Universal education is good for the public, but that’s not what economists mean by the term, merely what the term sounds like it should mean.
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Did I misread or is this just semantics?
Sounds like the argument is more about dropping the term ‘public goods’ because it can be misleading, but still teach the concept.
I think you laid out a very good explanation of public good in this post and it is certainly something that an undergrad econ major can and should be familiar with.
Edit: Duh, I guess you made that point in your second to last paragraph.
I like my explanation of public goods. It makes a great deal of sense to me, but it apparently doesn’t work on everyone. The professor in the graduate-level Business and Government class I took at UCI gave a very similar explanation in his lectures, but during class discussions he was constantly having to correct people who described something as a "public good" because it had broad benefits despite being excludable and rival.
Caplan’s proposal is to drop the term in undergrad classes (I’m not sure if he means all undergrad classes, or just the intro/survey classes everyone needs to take) in favor of teaching more about a less confusing concept that has a lot of overlap with the concept of public goods. I do think the concept is very important to teach, but I see Caplan’s concern about it being a waste of time because so many people just don’t get it (at least within the scope of an undergrad class).
On the topic of economic terms, I wish they would spend more time working on a better definition or explanation of the term “inflationâ€.Â
  I watched two dudes last week almost come to blows arguing over whether increasing oil prices are inflationary or deflationary.
I think the confusion is between a public good and public benefit.
Interestingly, none of this vocabulary was in use when I took my undergraduate econ courses and the term rent-seeking hadn’t been coined yet.
According to Milton Friedman oil has no impact on inflation.
The airwaves are not a very good example. The broadcast spectrum is limited, and one person or group’s use of it can definitely interfere with others. This is why you pay a license fee and document that you adhere to certain requirements to be allowed to use certain frequencies, and is also why the government set aside free "Citizen’s Band" portions of the spectrum. (Ham radio operators are somewhere in that mix too, I’m just not sure whether it’s part of the CB thing or a separate, similar but distinct, entity. But they have strict rules regarding their use of that "free" part of the spectrum, just like CB operators.)
I can assure you that if I start broadcasting a heavy signal on Channel 9 in Chicago, the people who own that station will be mighty displeased since I’d be interfering with their business. Indeed, an incident just like that did happen, you can read about it here.
This is a bit of a change of subject, but it goes back to a vague irritation I tend to have with libertarian-oriented thinkers: the inability to see that what they think of as a "market phenomenon" is nothing of the sort. Early on the government recognized that there’s only so much broadcast bandwidth available and that fights were already breaking out between rivals who wanted to use the same part of the spectrum, with little players and vandals interfering with legitimate businesses, or, conversely, big-monied players intentionally squelching out littler players. So the government created an FCC to deal with those issues and sort out who could use which frequencies, when and for what purposes. Public Radio and Public Television were created in part so that the spectrum wouldn’t be completely dominated by commercial players, as were the free citizen’s frequencies that anyone could use non-commercially. The rest of the spectrum was for people who wanted to make money.
Now you can argue that the FCC, like a lot of regulatory bodies, wound up being too restrictive. It used to be very easy to set up your own radio station to broadcast locally, and even local record stores used to do that, but now it’s too damned expensive in part because the FCC has made it too expensive. Nevertheless, that doesn’t take away from the fact that there was going to be government regulation of the airwaves one way or the other; either the courts would settle disputes over who had the right to broadcast on Channel 9 in and around Chicago and who didn’t, or, it would be dealt with legislatively.
This also goes back to my argument about the roads: the market didn’t give us roads, the government did. The market also didn’t give us corporations, the government did.
Now, whether having these things from government is good or not, or whether the government has regulated them exactly the way they should or not, is a separate argument. The fact is that "the market" produced none of these things–roads, corporations, or radio stations–without heavy help from the government to make it happen.
This is also, by the way, why we still need a Federal Communications Commission (FCC), even in an era where we’re increasingly seeing more and more narrowcasting: the bandwidth available is still limited, and the ability exists for people to vandalize the spectrum or to try to brute-force competition into oblivion. Someone’s got to make the rules; if it isn’t done by interstate regulatory bodies then it’ll be done by state legislative bodies, or at last resort by the courts, who will have to make case-by-case decisions as to whether or not X action by broadcaster A unduly interferes with Y action by broadcaster B.
Even the roads aren’t all that good an example, as too many people using the roads, or running the wrong kind of equipment on the roads, definitely takes away from other peoples’ ability to use the roads freely. Once again, we’re going to have government regulation of these things one way or the other, either through a haphazard set of organically-grown rules that judges make up as they go along and are forced to figure out for themselves what’s fair and what isn’t (in the traditional common law style practice) or we’re going to have the government setting up formalized rules through legislative and executive action.
As for inflation: prices going up is not inflation. Inflation is when money is worth less. One visible side effect of that is prices going up.
The price of one good going up is not an increase in inflation, it’s an increase in cost of that item, which may or may not have a significant impact on the cost of other items.
Inflation is, no more and no less, an increase in the amount of cash available to pay without a concurrent increase in the value of the services and goods available to buy with it. That’s pretty much what Milton Friedman won his Nobel for if I remember right, and is now pretty much the standing wisdom in economics: inflation is when you have an inappropriate increase in the amount of money available in the system, with more money available to pay for the same amount of goods and services.
Thus, even if oil prices go sky high, and oil-dependent goods and services go up in price, that’s not inflation. That’s an increase in costs. You could call that increase in costs "inflationary" but that’s very loose phrasing. Inflation is when the money is worth less, not when things cost more.
Dean, you may as well be arguing that pizza parlors are not a market phenomenon because the police will arrest you if you try to take a pie from Domino’s without paying for it.
Of course there needs to be some sort of system for determining who has a right to broadcast on a given frequency, the same way there needs to be some sort of system to determine who has the right to build on a piece of land or use a particular object. Even very extreme libertarians agree generally agree to that. I’ve read an essay by Ayn Rand arguing that the government should create and enforce a property-like right to broadcast on a given frequency.
There’s a word for people who don’t want the government to do anything, not even define and enforce property rights. The word is "anarchist", not "libertarian".
Well, it’s certainly true that regulation of commerce is a necessary and legitimate government function; arguably, it’s the main reason to have a government, since anything else the government does, including defense, can be handled by just hiring or breeding thugs to do your bidding.
Nevertheless, with making pizza, where the ingredients are plentiful and where a shortage of pizza won’t cause an overall shortage of alternative foodstuffs, the need for regulation is minimal: "don’t steal pizza, and don’t poison any pizza you sell" seems to be the minimum requirement.
In the case of broadcast frequencies, though, there is no way that market could possibly exist the way it does without government. It did not grow up organically by people and organizations spontaneously organizing around mutually agreed upon terms as to how to use it in harmony with each other; government defined the frequencies, defined how they could be used, and defined what it took to get a license to use them. Without that, the market would not have been able to create WGN, WOR, WLS, CBS, NBC, ABC, or any of those radio stations you listen to on drive-time (unless you’ve got Sirius or XM, but even they rely on the government to tell them what part of the spectrum they can use without interfering with the other broadcasters).
Now it’s true that you could have government to create "plots" of frequency and allow people to either stake claims or sell it, like they did with land. Or, they could license it. The government chose licensing. Regardless, it’s not a good argument to say that "the market" created the radio and TV stations, because this is very much a limited resource and my use of it can indeed infringe upon your desire to use it too. If I want to set up a jamming signal to completely block your television transmissions, what can you do about it except look to the government for relief? You have no other avenue, unless you want to hire people to beat me up if I jam your signal.
The airwaves are a public good, if I’m understanding the term "public good" properly. We all benefit from it, and it is in the general interest for that to be regulated if we want it to be useful at all. Every player in that market depends on the government to do this for them; the government is what created that market, and is still a vital part in sustaining it. Take all government out of it tomorrow, and you’ll either see the entire spectrum destroyed and worthless to just about anybody, or, we’ll see judges having to make hodgpodge decisions on a case-by-case basis. Because there’s only one pizza here, so we all gotta figure out how to dole it out.
The airwaves aren’t a public good because nobody makes the airwaves. They just are, the same way the oceans, rivers, and land just exist. In order to make them usable, the government defines and enforces rules to allow people to use them without stepping on each other’s toes. Defining and enforcing these rules is indeed a public good, although it’s often treated as a special case because having those rules defined and enforced (usually by the government, although small communities may be able to get away with doing it by consensus and social pressure) is generally considered to be a necessary precondition for a market economy (although anarcho-capitalists disagree, arguing that hiring thugs to beat people up if they take your pizza or jam your broadcasts is a viable solution).
The problem I was examining in my original post was how content winds up being broadcast on the airwaves once broadcast rights are assigned. We can examine that question narrowly, independently of the question of how to allocate broadcast rights (whether by FCC-style licensing, by auctioning or homesteading property rights to broadcast bands, or through another method).
So let’s say that in recognition of my services to mankind, I am created the Baron of 42.1 FM. I have the exclusive right to broadcast on 42.1 FM in the United States, but do I want to? Buying or making content takes time and effort, and broadcasting equipment isn’t free. I need some revenue source in order to make broadcasting economically viable, and that’s a tricky issue because having content broadcasts on 42.1 FM is a public good.
Maybe I can get the government to tax every potential listener to pay my expenses — this is the classic solution to the public goods problem.
Maybe there’s someone whose private benefits are so high that he’s willing to pay the entire costs himself and let everyone else freeload. E.g. Warren Buffett pays me $1 million/year to play his favorite songs 24/7 so he doesn’t have to worry about losing his iPod.
Maybe I’m a philanthropist who is willing to subsidize the effort out of the goodness of my heart.
Or maybe I figure out a clever way to sell a private good associated that piggybacks on the broadcast (such as advertising) or to make the broadcast excludable (through encryption).
My point being that while government provision of public goods is a widely accepted solution to the public goods problem, and it’s often the best solution, it isn’t necessarily the only viable solution when the public goods problem crops up.
Maniakes: Well that makes sense.
It is interesting, by the way, that the British (and I’m sure other countries, I only know of it among the British but I imagine they’re not alone) is that they started by taxing people for their televisions and radios, which is still how they mostly pay for the BBC. But they also decided at some point to allow private competitors in that market too, which would sink or swim on their own merits. It seems to have worked out quite well for them, the BBC is still very popular but there’s lots of non-BBC content to choose from too.
Anyway, I think I myself am having a little trouble with the meaning of the term "public good" which may be part of why I’m arguing, and may also relate to the contention that we should use different words because "public good" is confusing even to people who’ve read up on economics.
I vaguely recall seeing a British actor (I think it was Jon Pertwee) being interviewed during a PBS pledge-drive several years ago, talking about how the US is unique in having largely donation-funded public television, while just about every other country had purely tax-funded public television. If my memory is accurate, that implies the BBC-style solution is very common.
I think what you’re thinking of as a public good is any good which is owned by the public (either formally owned by the government; or no formal ownership, leaving usage open to any member of the public), which makes sense given the literal implicaitons of the termand is consistant with colloquial usage of the term. The economic term for a good owned by the public is a "commons" (as in "The Tragedy of the Commons"). It gets more confusing, since there’s considerable overlap between the concepts of commons and public goods.
I think Jim Glass, back in the comments section of Caplan’s post, has the right idea: drop the term "public goods", and start referring to things that are nonexcludable and nonrival as "bartfizzles".
For what it’s worth, Caplan is a self-professed anarchist.  See, for instance, this article of his on the private provision of law. I don’t agree with his conclusions, but I do think he has at least thought through a number of the objections Dean has raised.Â
Caplan may also call himself libertarian – I’m not sure. Often libertarians include both anarchism and "minarchism" as sub-classes of libertarianism. By the way, another famous libertarian-anarchist is David Friedman, Milton’s son.
On education — it is certainly not a pure public good, but unlike with an apple, there are some positive externalities associated with "consuming" education. For instance, to the extent that someone is educated to be a good and moral citizen of his or her state/community — that benefits everyone in that state or community. That is just to say that the social benefit from one’s education (sum of the private gain of that individual plus all the gains to others from that individual’s education) is greater than the private benefit from one’s education. This show thats there is a private-public goods spectrum, and that, further, there will be arguments for public provision of goods falling somewhere in the middle of that spectrum. Whether those arguments are good or not, however, depends on the relative efficiency of public vs. private provision of those goods. But often this question cannot be answered a priori, which is why I think it is good that different countries try different approaches to provision of public and quasi-public goods.
Ok, I just realized that Caplan essentially made the point I made above on education: "How many times have you heard an economist say that ‘education is a public good,’ when at most he means that ‘education has positive externalities’?"
But my biggest problem with his suggestion is just a practical one. Much of the point of education is to prepare students to be able to learn from and react to "knowledge" they encounter outside of school. Since the discussion of "public goods" is very prevalent in economics and policy research, students should be taught the meaning of the term. A better proposal, similar to Caplan’s, would be to teach students that "non-rival" = "zero marginal cost" and that "non-excludable" = "positive externalities". That way, they will still know what people mean when they say "public good", but they will have a fuller understanding of that class of goods, and be able to understand better how they differ and relate to "regular" private goods.
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