Legal Theory Lexicon 029: Public and Private Goods

Introduction

One of the most powerful ideas that legal theory borrows from economics is the idea of a "public good." Sooner or later law students learn that within the framework of contemporary neoclassical economics, the standard line is that public goods (e.g. national security) should be provided by government whereas private goods (e.g., automobiles) ought to be provided by markets. For legal theorists, the line between public and private goods tracks one of the important fault lines in the law--between the private law fields of property, contract, tort, and so forth and public law fields such as environmental law, administrative law, and constitutional law. This post provides a basic introduction to the economic distinction between public and private goods for law students (especially first year law students) with an interest in legal theory.

It may be helpful to quickly preview the basic idea. So here goes:

• Public goods have two characteristics--nonrivalrousness and nonexcludability. For example, consumption of national defense is nonrivalrous (my being protected by the U.S. armed forces doesn't diminish your protection). National defense is a nonexcludable good: the Army cannot say to Mexico, "Solum hasn't paid his national defense bill, "Go ahead and attack him."
• Private goods are rivalrous and excludable. If I own a laptop computer, my use of it diminishes your ability to use it; therefore, my consumption of the laptop rivals yours. Moreover, I can exclude you from the use of my laptop (by locking it up when I am not using it).

On the neoclassical picture, we use markets to provide goods like laptops (that are excludable and rivalrous), but government provides goods like national defense (that are nonexcludable and nonrivalrous).

A Note on Terminology: "Public Goods" versus "Public Interest" versus "Public Resources."

Before we go any further, let's make sure we agree about how we are using the phrase "public good." This is important because the same phrase is used for different purposes in different contexts. So let's stipulate to the following:

• The phrase "public good" or "public goods" shall be used in this post to refer to the economists’ idea of goods (in the broad sense that includes both "goods" and "services") that meet the criteria of nonrivalrousness and nonexcludability.
• The phrases "public interest" or "common good" shall be used to refer to the idea of goods that benefit the public at large as distinguished from goods or interests that benefit a faction (or "special interest group").
• The phrase "public resource" shall be used to refer to private goods that are owned by the government or held in trust for the public. National parks are indisputably public resources, but it may not be the case that they are public goods in the economic sense.

We could use the phrase "public good" to refer to the public interest or to public resources, but for the purposes of this post, let's stipulate that "public good" shall be reserved for the economic sense of the phrase.

The Criteria for Public Goods

There are two criteria by which public goods and distinguished from private goods. A good is public only if it is both nonrivalrous and nonexcludable. A good is private only if it is both rivalrous and excludable. (We will deal with the mixed cases in just a bit.)

"Rivalrousness" is a property of the consumption of a good. Consumption of a good is rivalrous if consumption by one individual X diminished the opportunity of other individuals, Y, Z, etc., to consume the good. Some goods are rivalrous because they are "used up." If I drink a glass of Heitz Martha's Vineyard, then you cannot drink that same glass of wine. If I set off a firecracker, you cannot set off the same firecracker. Other goods are rivalrous because of crowding effects. If I am using the free internet terminal at the student lounge, then you cannot use the same time slice of the terminal--because only one person can sit in front of the screen at the same time.

"Excludability" is also a property of consumption of a good. It is helpful to distinguish two forms of excludability: (1) excludability through self help, and (2) excludability through law. If I want to exclude you from my land, I can build a fence--the exclusion results from self help. But if I want to exclude you from copying a novel that I've written and I want to make the novel generally available for sale, self help will not work. (It would be ridiculously expensive to hire a guard to monitor each copy or every photocopy machine.) Government, however, can make unauthorized copying a criminal offense or actionable civil wrong, thereby creating exclusion through law.

Markets and Government

The conventional view is that markets should provide private goods and government should provide public goods. The case for market provision of private goods relies on the idea of Pareto efficiency. The weak Pareto Principle is the simple idea that if some action would make at least one person better off and no one worse off, then that action is good. If we have a private good, e.g. a widget, and a willing buyer and seller, then allowing the sale is Pareto efficient: the buyer prefers the widget to the money and the seller prefers the money to the widget. If we assume that the transaction has no external costs (harms to third parties), then allowing the transaction makes buyer and seller better off and hence is required by the weak Pareto principle.

But when we come to public goods, markets simply don't work. Why not? Most simply, because if a good is nonexcludable, then no one will pay for it. Suppose someone goes into the business of cleaning the air with a pollution removal machine. I won't voluntarily pay for this service, because I will be able to breathe the air even if I don't pay. If a private firm offered to defend me against foreign invaders, I won't voluntarily sign on. My individual payment would have a negligible effect on the size of the armed force. If others pay, I don't need to. If others don't pay, then my payment won't do any good. Of course, you will recognize that I am describing the free rider problem, a form of the Prisoner's Dilemma. Because markets cannot provide public goods, governments should.

As you might expect, the argument for government provision of public goods and market provision of private goods is controversial. Socialists argue that governments may do a better job of providing private goods, because government planning can create welfare benefits that cannot be realized by markets. Libertarian legal theorists argue that markets can provide most if not all private goods for various reasons, including arguments that nonexcludability can often be overcome by ingenious market solutions. I won't get into either the socialist or the libertarian critique of the argument for market provision of private goods and government provision of public goods, but you should know that these criticisms have been extensively developed. 

The Expanded Typology: Public, Private, Toll, and Common Pool Goods

So far, we have been assuming that excludability and rivalrousness go together and hence that there are only two categories, public goods and private goods. In fact, it is possible to have a good that is rivalrous but nonexcludable or one that is nonrivalrous but excludable. So there are four categories, not two:

1. Public goods are nonrivalrous and nonexcludable.
2. Private goods are rivalrous and excludable.
3. Toll goods are nonrivalrous and excludable.
4. Common pool goods are rivalrous and nonexcludable.

Table One shows the four categories as a two-by-two matrix:

We've covered the first two categories, but we need to consider categories three and four. So let's do that now. 

Toll Goods and Intellectual Property

A toll good is characterized by nonrivalrous consumption but excludability. Suppose we have a highway in a rural area, where the capacity of the highway would never be approached even if access were free. Nonetheless, use of the highway can be limited by the installation of toll booths. This means that we can charge for access to the highway. Economists call goods that are nonrivalrous but excludable "toll goods."

One of the most important applications of the concept of a toll good in legal theory arises in the context of intellectual property. A simplified version of the conventional story goes something like this. Without intellectual property rights created by law, the information (e.g. the invention or composition) would be a pure public good. In a world without intellectual property, for example, the first copy of a new book could be copied by the first purchasers. This copy could then be copied by others. Eventually, the "free" copies would dominate the market. And this would destroy the incentives of authors to write! (More on the question whether this is right towards the end of this post.)

Intellectual property law comes to the rescue. By enforcing patents and copyrights through legal sanctions, intellectual property law transforms information from a public good to a toll good. Intellectual property law creates excludability, but not rivalrousness.

Common Pool Goods and the "Tragedy of the Commons"

Common pool goods are rivalrous but non excludable. An example might be the fish resource in those portions of the ocean that are outside national waters (the high seas). This resource is rivalrous, because over fishing can result in a reduction of the stock of fish. But excludability is difficult to establish. Self-help would work for a localized fishing area where the fish population does not range over a large area; in theory a patrol boat could establish a virtual fence. But this solution won't work if the fish population ranges over a wide area of the high seas. Unless some international treaty regime can establish enforceable quotas, the result may be a "tragedy of the commons." Each fisher has an incentive to take the most she can, but the result of all fishers doing this is a depletion in the stock of fish that harms everyone. (Once again, we have a version of the Prisoner's Dilemma.) 

Club Goods

We are almost done, but we have one or two more ideas to pick up. One is the idea of a "club good." A club good is a good where the utility of each individual's consumption of the good is a function of the number of others who consume the good. Take a golf course. If too many people try to use the course simultaneously, then the utility that each derives from the experience goes down. Golfers have to wait for tee times, the course is crowded, and so forth. In other words, there are "crowding" problems. One solution to such problems is to form a "club," which limits the number of persons with the right to use the golf course.

Private Goods and the "Tragedy of the Anticommons"

And finally, we should note the flip side of the tragedy of the commons, dubbed by Frank Michelman, "the tragedy of the anticommons." This refers to the phenomenon where ownership in a resource has been divided among so many owners that transaction costs and holdout problems prevent Pareto efficient transactions from occurring. For example, when property was "privatized" in the former Soviet Union, a single apartment building might end up with many, many fractional owners, including ownership interests by various government entities and the residents of the building. In theory, every owner must agree before a transaction involving the building could take place. Given the large number of owners, the costs of completing the transaction and paying off the holdouts (those who withhold consent in order to increase their share of the profits) can make the transaction economically unattractive. This is a case where the market is incapable of efficiently allocating a pure private good.

Conclusion

The public/private goods distinction is basic to a variety of topics in legal theory. Whenever you encounter a resource allocation problem, ask yourself, "Is this resource a public, private, toll, or common pool good?" And then ask, "Could a change in the legal rules governing this resource change its status?" Although the terminology may be daunting at first, the concepts are really very simple and straightforward.

Related Lexicon Entries

• Legal Theory Lexicon 060: Efficiency, Pareto, and Kaldor-Hicks
• Legal Theory Lexicon 007: The Prisoners' Dilemma

Bibliography

• Richard Cornes & Todd Sandler, The Theory of Externalities, Public Goods, and Club Goods (1996).
• Daniel H. Cole, Graham Epstein, & Michael D. McGinnis, Digging Deeper into Hardin's Pasture: The Complex Institutional Structure of 'The Tragedy of the Commons' (2013).

Internet Resources

• Public Goods, The New Palgrave (subscription required)
• Public Good, Wikipedia
• Public Goods and Externalities by Tyler Cowen, The Concise Encyclopedia of Ecomomics
• Tragedy of the Anticommons, Wikipedia
• Christopher Yoo, Copyright and Public Good Economics (2007)

(This post was last revised on July 16, 2023.)