Public Goods and Common Resources

Prerequisites: Strategic Interaction and Cooperation · Externalities and Social Costs

A residential community wants to install streetlights, while another community wants to protect a fishery. Both issues involve many people, yet the dilemmas are opposite: for streetlights, the challenge is that everyone hopes someone else will pay to provide them; for the fishery, the challenge is that everyone may want to take a little more. Labeling both simply as "common-pool resources" can lead to prescribing incorrect rules.

This article first distinguishes between excludability and rivalry, then examines one case of collective provision and one case of common use. The numbers are pedagogical settings; the classification serves to explain mechanisms and does not determine who must own or operate the goods.

Two Questions Determine Classification

Excludability asks whether it is possible to prevent non-payers from using the good at a reasonable cost; rivalry asks whether one person's use reduces the quantity or quality available to others.

Government-produced breakfasts remain rivalrous and can be distributed per person; privately built streetlights may still benefit non-paying neighbors. Therefore, "public goods" is not synonymous with "things provided by the government."

Classifications also change with technology and congestion levels. Toll facilities can enhance excludability, while serving too many users can reduce the quality of simultaneous use. For specific issues, one should specify the scope of use and congestion conditions; labels should not be treated as the permanent nature of the goods.

Streetlights: Total Value is Sufficient, Why Does No One Buy Alone?

Three households can see the same streetlight. The relevant costs for installation and maintenance are 90, and the value to each household is 40. Installing just one light provides illumination to all three households simultaneously. The total value is 120, which exceeds the cost of 90, leaving a net benefit of 30.

If one household pays the full cost of 90 alone, it receives only a value of 40, resulting in a net loss of 50; the other two households benefit for free. Each household waits for the others to pay, potentially resulting in no one installing the light. This difficulty is called the free-rider problem, which prevents valuable collective provision from being realized.

If the three households could form and enforce an agreement where each pays 30, each would gain a net benefit of 10, allowing the project to proceed. However, "total compensation is possible" does not mean everyone has agreed, nor does it mean the agreement will automatically be executed. One must also clarify collection, maintenance, exit, and accounting responsibilities.

The aggregation of demand for public goods differs from private goods. The three households consume the same light; therefore, under this common quantity, we sum their individual values (40+40+40), rather than saying each household wants one light, totaling three lights. If deciding whether to install an additional light, one should compare the sum of the marginal values of all beneficiaries for that light against the marginal cost.

Adding Distributional Differences, Flat Fees May Not Be Appropriate

Now, the three households' values for the streetlight are 70, 40, and 10, respectively. The total value remains 120. When charged 30 each, the third household suffers a net loss of 20 and would oppose it; the project's total net benefit is positive, but this does not guarantee that equal sharing will be accepted by everyone.

One possible allocation is 50, 30, and 10, totaling 90, resulting in net gains of 20, 10, and 0 for the three households, respectively. However, this is merely a feasible arrangement when true values are known. If households can underreport their value to pay less, how to collect information, verify benefits, and guarantee basic rights becomes part of institutional design.

Government taxation, homeowner agreements, donations, matching grants, and club fees may all support provision. Comparing them requires looking at execution costs, coverage, true preferences, and distributional outcomes, rather than simply choosing a provider based on the public goods label.

Fishery: Why Everyone Wants to Catch More

Consider a fishery where entry is difficult to restrict. When one person catches a fish, it cannot be caught by others simultaneously, and it may also reduce future breeding resources. The problem shifts from "who pays to build it" to "who constrains their own extraction."

Assume two fishermen each choose between moderate or high-intensity fishing. The table below synthesizes current catch revenue, operational costs, and foreseeable impacts on future resources into net benefit points as a simplified one-shot interaction; it is not an actual fish population growth equation.

If B fishes moderately, A can raise their net payoff from 3 to 5 by fishing more; if B fishes at high intensity, A can raise their net payoff from 1 to 2. Both parties have private incentives to increase extraction, potentially resulting in each getting 2, totaling 4, which is lower than the 6 obtained under joint moderate fishing. The cost of one's own increased catch is borne by others and future users, so it is not fully accounted for in individual marginal calculations.

The "tragedy of the commons" here does not prove that common ownership inevitably fails. The state of open access with no rule enforcement is distinct from common management with member boundaries, monitoring, and negotiation systems. To study real fisheries, one must also incorporate fish population growth, seasons, fishing technology, and changes in entrants.

Set Rules for Use, Rather Than Just Persuading People to Pay

Defining members and entry conditions, setting catch limits, specifying gear and seasons, monitoring extraction, and arranging dispute resolution can all alter the incentives for the fishery. Tradable quotas can direct extraction rights to higher-value uses, but initial allocation, concentration, and monitoring costs still need discussion; clearly defined property rights do not automatically eliminate impacts on those outside the boundaries.

Simply raising funds to buy more boats may increase fishing capacity, thereby exacerbating resource pressure. Simply limiting electricity usage to solve the streetlight funding problem might also miss its characteristic of shared use. Rules should target the mechanism: for streetlights, the priority is to implement collective provision and cost-sharing; for fisheries, the priority is to handle entry, extraction, and renewal.

If excessive streetlight brightness affects residents' sleep, a negative externality arises; if toll roads become congested during peak hours, common use begins to exhibit rivalry. Classification can help decompose problems, but the same facility may simultaneously involve public provision, congestion, and externalities, requiring separate accounting.

Migrating with Two New Scenarios

An open-source software package has very low replication costs, yet no one is willing to maintain it long-term. A free popular service has easy replication requests but often experiences queuing. Are they exactly the same problem?

Three households value the streetlight at 70, 40, and 10, respectively, with a cost of 90. If the third household refuses to pay, can the project still be feasible if the first two households pay? Does this solve all institutional problems?

Sources and Further Reading

These references support concepts and statistical definitions; the numerical cases and diagrams are original synthetic teaching examples.

OpenStax · Public Goods · CORE · Market Failures and Government Policy