Market Failures, Externalities and Public Goods

Topics: Public good, Market failure, Externality Pages: 6 (1955 words) Published: March 10, 2009
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 consumers who benefit but do not contribute to the production of those goods Negative externalities include the pollution that is created when new tourism develops on the lake created by the dam. The development of public goods seems to have been externally created by environmental conditions influencing individuals. Individuals are influenced actions of their surroundings; such as production of new goods, government policies, or market conditions. Arthur C. Pigou helped developed what is known as welfare economics. This approach to economics uses techniques to determine efficiency and income distribution at the simultaneously within an economy. John Maynard Keynes critiqued this and added his own views on the subject. Keynes stressed the relationship between income and expenditure while Pigou focused on relationships of wealth and expenditure. Economists such as Vilfredo Pareto, John Hicks, and Nicholas Kaldor contributed to the development of the new welfare economics. These two welfare economies attempt to answer the question of fulfilling optimum conditions in segments of the economy that would lead to enhanced economic welfare. These lead to the findings of spillover benefits for which the beneficiary did not pay or an injured party did not receive compensation. These matters were treated in the new welfare economics under the subject of “externality” (Speigal 572-578). The government must invest money to get the economy moving. This can be seen in history during the Great Depression when the FDR presidency put people to work to build dams, roads, etc. The free market did not fix the Great Depression, and government intervention was needed. This conflict between consumers and producers has produced economic analysis of government intervention in the market place. Government intervention is most justified with positive externalities when the government owns certain industries and bans other products when negative externalities exist. Those who favor free markets see...

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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 .
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