One Public Good: Why the Market Fails and Three Ways to Pay

The idea

One public good carried from its properties to its provision shows the whole argument in order. Take a river levee for a town of a thousand households. It is nonexcludable: once built it protects every house on the floodplain. It is non-rival: protecting one more house costs nothing. Now the market. A builder offers the levee and bills each household. Each reasons that the levee will protect it whether it pays or not, so the best reply is not to pay; the builder collects little and the levee is not built, though it is worth more to the town than it costs. That is the market failure, and its deadweight loss is the levee's whole net benefit, forgone. The efficient quantity follows from the definition: because every household consumes the same levee, the benefit of one more foot of height is the sum of every household's gain from it, and the efficient height is where that sum equals the marginal cost of building. Three ways to pay follow. Taxation: the town levies every household, the free-rider choice is removed, and the levee is built. Indirect provision: some goods can be tied to something excludable, as broadcasting is paid by advertising and a park by its parking, though a levee has no such handle. Voluntary provision: a small town where everyone is known can raise the money by appeal and shame, but the method weakens as the group grows. The choice among them is about the size and knowability of the group, not the good.