Market Failures, Externalities and Public Goods
The history of economics has always been changing from the ancient Greeks to the mercantilists to the neoclassic economists. Concepts and theories have been formulated to perfection only to be amended or even proven wrong. However, those concepts and theories have developed over time to inspire even greater thoughts on economics in which we know them today. One of those concepts is the concept of public goods. This concept has long been debated and still today is still relevant in our economic world.
The concept of what is known today as “public goods” was first attempted to be explained by economist Paul A. Samuelson. Samuelson is credited to be the first to attempt to characterize public goods in 1954 in a writing called The Pure Theory of Public Expenditure. He defines in his paper what he calls a “collective consumption good” as: “…goods which all enjoy in common in the sense that each individual’s consumption of such a good leads to no subtractions from any other individual’s consumption of that good...” (Samuelson 387-389)
Adam Smith explained that selfishness leads markets to produce whatever people want. In order for a producer to make money he or she must sell what the public wants to buy. Externalities undermine the social benefits of individual’s selfishness. Smith pointed out that if consumers do not have to pay producers for benefits, they will not pay. If producers do not receive pay, they will not produce. This leads to valuable products not being produced (Caplan). This is what economists say is a market failure. Public goods arise from this line of economic thinking. These market failures provide no incentive for people to build dams, highways, armies etc. These are all market failures that cam be remedied through government intervention…i.e. public goods. Externalities can be beneficial and negative; much like public goods can provide beneficial qualities to those who consume them. Public goods become negative when they are “abused” by
The concept of what is known today as “public goods” was first attempted to be explained by economist Paul A. Samuelson. Samuelson is credited to be the first to attempt to characterize public goods in 1954 in a writing called The Pure Theory of Public Expenditure. He defines in his paper what he calls a “collective consumption good” as: “…goods which all enjoy in common in the sense that each individual’s consumption of such a good leads to no subtractions from any other individual’s consumption of that good...” (Samuelson 387-389)
Adam Smith explained that selfishness leads markets to produce whatever people want. In order for a producer to make money he or she must sell what the public wants to buy. Externalities undermine the social benefits of individual’s selfishness. Smith pointed out that if consumers do not have to pay producers for benefits, they will not pay. If producers do not receive pay, they will not produce. This leads to valuable products not being produced (Caplan). This is what economists say is a market failure. Public goods arise from this line of economic thinking. These market failures provide no incentive for people to build dams, highways, armies etc. These are all market failures that cam be remedied through government intervention…i.e. public goods. Externalities can be beneficial and negative; much like public goods can provide beneficial qualities to those who consume them. Public goods become negative when they are “abused” by
Bibliography: Caplan Bryan, "Externalities." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 26 November 2008. . Cowen Tyler, "Public Goods." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 26 November 2008. . Holcombe, Randall G.. "A Theory of the Theory of Public Goods." Review of Austrian Economics Vol 10, No 1 1997 4-6. 26 Nov 2008 . "James M. Buchanan." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 26 November 2008. . Jasay Anthony de, "The Failure of Market Failure. Part II. The Public Goods Dilemma." November 6, 2006. Library of Economics and Liberty. 26 November 2008. . "Ronald H. Coase." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 26 November 2008. . Samuelson, Paul A. "The Pure Theory of Public Expenditure." The Review of Economics and Statistics Vol 36, No 4 1954 387-389. 20 Nov 2008 . Spiegel, Henry William. The Growth of Economic Thought. 3rd. Durham & London: Duke University Press, 1991