Public Goods

While negative externalities like pollution or global warming command most of the headlines, positive externalities may well be economically more significant. Important examples of positive externalities are construction of a highway network, operation of a national weather service, support of basic science,and provision of measures to enhance public health. These are not goods which can be bought and sold in markets. Adequate private production of these public goods will not occur because the benefits are so widely dispersed across the population that no single firm or consumer has an economic incentive to provide the service and capture the returns.

The extreme example of a positive exclude-is a public good. Public goods are commodities for which the cost of extending the service to an addtional person is zero and which it is impossible to exclude individuals from enjoying. The best example – of a public good is national defense. When a nation protects its freedoms and way of life, it does so for all its inhabitants, whether they want the protection or not and whether they pay for it or not. Because private provision of public goods is generally insufficient, the government must step in to encourage the production of public goods. In buying public goods like national defense or lighthouses, the government is behaving exactly like any other large spender. Bycasting sufficient dollar votes in certain

directions, it causes resources to flow there.Once the -dollar votes are cast, the market mechanism then takes over and channels resources to firms so that the lighthouses or tanks get produced.

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