In economics, a public good is some economic good which possesses two properties:
- It is non-rivalrous, meaning that it does not exhibit scarcity, and that once it has been produced, everyone can benefit from it.
- it is non-excludable, meaning that once it has been created, it is impossible to prevent people from gaining access to the good.
Public goods provide a very important example of market failure. Because no private organisation can reap all the benefits of a public good which they have produced, economic theory concludes that there will be insufficient incentive to produce it. Consumers will take advantage of public goods, without contributing to their creation. This is called the free rider problem.
One general solution to the problem is for governments to raise taxation to fund the production of public goods. The difficulty is to determine how much funding should be allocated to different public goods, and how the costs should be split (see resource allocation mechanisms, public finance).
Another solution, which has evolved for information goods, is to create intellectual property laws, such as copyright or patents, covering the public goods. These laws attempt to remove the natural non-excludability by prohibiting reproduction of the good. Although they can solve the free rider problem, the downside of these laws is that they create a monopoly (often with significant market power) and (almost always) cause a deadweight loss. Enforcement costs (see Software piracy) are often substantial. Schumpeter says that the "excess profits" generated by the copyright monopoly will attract competitors that will make technological innovations and thereby end the monopoly. This is a continual process referred to as "Schumpterian Creative destruction". Microsoft, for example, is co-operating in this process by increasing its prices, making Linux/Macintosh increased market share largely inevitable. It is rational for Microsoft to behave like this until its market share is eroded to a level where counterattack with price cuts is optimal.
See also: Club goods