PUBLIC GOODS/PUBLIC CHOICE - PHILLIPS

Public goods are usefully divided into three types.

Type I Public Goods.

• Type I Public Goods provide:
  • Large benefits to large numbers of people.
  • Small costs to small numbers of people.
  • Such that the sum of their benefits is greater than the sum of their costs.
• Examples. National defense, inoculations against communicable diseases, lighthouses.
• Economic analysis:
  • From a normative standpoint, as their benefits outweigh their costs, resources should be allocated to the production of Type I Public Goods.
  • From a positive standpoint, societies tend to allocate resources to Type I Public Goods.

Type II Public Goods.

• Type II Public Goods provide:
  • Small benefits to small numbers of people.
  • Large costs to large numbers of people.
  • Such that the sum of their benefits is less than the sum of their costs.
• Examples. Mass suicide. Members of certain sects may receive short-lived benefits, but in the long run their costs are larger than their benefits, such that the sum of their benefits is less than the sum of their costs. Obviously, most people view Type II Public Goods as "bads," not as "goods." Consequently, examples are difficult to imagine.
• Economic analysis:
  • From a normative standpoint, as their costs outweigh their benefits, resources should not be allocated to the production of Type II Public Goods.
  • From a positive standpoint, societies tend not to allocate resources to Type II Public Goods.

Type III Public Goods.

• Type III Public Goods provide:
  • Large benefits to small numbers of people.
  • Small costs to large numbers of people.
  • Such that the sum of the benefits is less than the sum of the costs.
• Examples. Ceteris paribus, anything which inhibits free trade, e.g., tariffs, quotas, etc.
• Economic analysis:
  • From a normative standpoint, as their costs outweigh their benefits, resources should not be allocated to the production of Type III Public Goods.
  • From a positive standpoint, due to the rational ignorance effect and special interest effect however, societies tend to allocate resources to Type III Public Goods.
  • Paralleling Market Failures to efficiently allocate resources to the production of goods with significant externalities, Type III Public Goods are an example of Public Choice Failure.

Last Updated: April 25, 2004, 9:00am est