I have a more fundamental beef. Could we please please all agree to change the definition of what constitutes a pure public good. The classic definition is that a pure public good is one that is a) non-rivalrous in consumption, and b) non-excludable.
I want to remove the second of these from the definition. Non-rivalrousness relates to the nature of the good; non-excludability relates to what mechanisms would allow for it to be provided. This conflates two quite distinct ideas and so is not helpful for a number of reasons.
First, microeconomics courses typically move straight from the definition of a public good to finding the condition for the optimal level of its provision (the Samuelson condition in intermediate micro; or, in partial-equilibrium terms, stating that the sum of the willingness to pay should equal the marginal cost). This optimality condition is equally true of any good that is non-rivalrous in consumption, whether it be excludable or not, but that is not the impression you would get reading treatments that show the optimality conditions after imposing a definition of excludability.
Second, non-excludability is neither necessary nor sufficient for public provision to be the only or even the best means of provision: Just because a good is excludable, it does not necessarily follow that it can be profitably supplied by the private sector if there is variation in consumers’ willingness to pay and limited opportunities for price discrimination; and a good being non-excludable does not mean that it could not be provided privately through philanthropy, being tied to other goods, etc.
Third, the standard definition leaves a gaping hole in most (possibly all) textbook treatments of market failures. We typically move from the first welfare theorem (a competitive market outcome is Pareto efficient) to a listing of potential market failures under which the theorem may not hold—incomplete markets, lack of property rights, transactions costs, monopoly, asymmetric information, externalities, and public goods. If public goods are required to be non-excludable by definition, this list is missing a very important market failure—non rivalrous but excludable goods, which might be provided by a private market, but not at the efficient level.
Finally, by conflating properties relating to the provision of a good with properties relating to how it enters consumers preference functions, we add to the likelihood of students thinking that a public good is one that is provided by the government and a private good one provided by the
O.K. So I am not going to be able to bring about a change in the world’s textbooks with this post, but any prospective Canterbury ECON 203 students who might be reading this, please take note: We will be using the non-standard definition next semester!
