April 17, 2023

Cost-Benefit Analysis of Public Goods

Often, the public sector (government) is called upon to produce goods or services that private market producers either cannot or will not provide. In these cases, it is often necessary to do a cost-benefit analysis of a public good in order to determine whether it makes sense for the government to invest taxpayers’ money.

Definition of a public good

A public good is a non-rivalrous, non-excludable good from which a group of individuals can consume it without excluding other consumers or causing the value of the good to decline. Some examples include street lights, radio waves, scenic beauty, clean air, biodiversity and carbon sequestration.

Partial and full public goods

There are a number of ways to distinguish between partial and full public goods. The distinction is based on the ability to exclude individuals from using the good, and also on how easy it is for the good to become overused.

Example of a partial public good: A streetlight that only allows users to light up their houses, but not the entire neighborhood.

The good does not impose a financial cost on users who want to exclude others from consuming the light, and it is easy for the good to become overused.

In addition to non-rivalrous and non-excludable qualities, a good must be fully accessible. This is often called the "free-rider problem," because it results in consumers who do not pay a price to consume the good, even though they are fully entitled to do so.


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