9781118041581

Public Goods 471

government program is fair game for the application of the benefit-cost

approach. We begin by discussing the economic rationale for the govern-

ment’s provision of certain kinds of public goods. We then go on to out-

line the basics of benefit-cost analysis.

PUBLIC GOODS

Why are some goods and services provided by government rather than by pri-

vate markets? What features characterize public goods? A pure public goodis

one that is nonrival and nonexclusive. Roughly speaking, it can be said that “if

anyone enjoys the public good, everyone enjoys it.’’ We can think of a pure

public good as the extreme case of an externality: All benefits are external.

The prototypical example of a pure public good is national defense. Defense

is nonrival; that is, all citizens within the protected area enjoy the benefits of

defense. (One state’s enjoyment of national defense does not subtract from

another state’s enjoyment.) Furthermore, national defense is nonexclusive: It

is impossible (or certainly impractical) to single out and exclude a particular

town or region from the national defense network. A considerable range of

other goods, from local police protection to municipal mosquito abatement,

share these two properties of pure public goods.

Whether or not it is exclusive, a nonrival public good has the feature that

increased benefits can be provided to additional people at zero (or negligible)

marginal cost. An uncongested highway or bridge has this property. The mar-

ginal cost of additional users is zero or nearly so. Even though exclusion is fea-

sible, it should not be employed. As we shall see, the greatest collective benefit

occurs when the highway is toll-free. At a price of zero, no one is excluded and

usage is maximized at no additional cost.

Public Goods and Efficiency

Under the basic benefit-cost rule, the government should undertake a project

or program if and only if its total benefits, summed over all its users, exceed its

total costs. Thus, a stretch of highway should be built if the collective benefits

to users (discounted over the course of its life) exceed its total costs—the cost

of land taken, highway construction, and annual maintenance.

We can refine the question of whether or not to build a highway: What

is the optimal size highway to build? Here, we take highway “size’’ to mean

length in miles. A longer span of multilane, high-speed roadway delivers

faster and more numerous trips to more destinations but at an additional

construction cost. Consider the planning problem depicted in Figure 11.3.

The horizontal axis lists highways of different lengths (in miles) that might

be built. The MC curve shows the marginal cost (in millions of dollars) of

c11RegulationPublicGoodsandBenefitCostAnalysis.qxd 9/29/11 1:34 PM Page 471