47
Lighthouses are a public good
from which it is hard to exclude
non-payers, and which many people
can use at the same time. They are
invariably provided collectively.
See also: Free market economics 54–61 ■ External costs 137 ■ Markets and
social outcomes 210–13
LET TRADING BEGIN
supply profitably. This problem,
known as “free-riding” (where
consumers enjoy the goods without
paying for them) means that there
is no profit incentive. However,
there is a demand for these goods,
and because private markets
may not be able to satisfy this
demand, public goods are usually
provided by governments and
funded through taxation.
A failure of the market to provide
these goods was recognized by
the philosopher David Hume in the
18th century. Influenced by Hume,
Adam Smith (p.61), an ardent
advocate of the free market,
conceded that a government’s role
was to provide those public goods
that it would not be profitable for
individuals or firms to produce.
There are two distinguishing
characteristics of public goods that
cause them to be undersupplied by
the markets: non-excludability,
meaning that it is difficult to
prevent people who don’t pay for
the goods from using them; and
non-rivalry, meaning that one
person’s consumption of the good
does not diminish the ability of
others to consume it. A classic
example is street lighting; it would
be almost impossible to exclude
non-payers from enjoying its benefits,
and no individual’s use of it detracts
from that benefit to other users.
As industrial economies
developed in the 19th century,
countries had to overcome the
problem of free-riding in areas such
as intellectual property. Intangible
goods, such as new knowledge and
discoveries, have the attributes of
non-excludability and non-rivalry,
and so are at risk of being
undersupplied by the market. This
could discourage the development
of new technologies unless they
can be protected in some way. To
do this, countries developed laws
granting patents, copyright, and
trademarks to protect the returns
from new knowledge and
inventions. Most economists
acknowledge that government has
a responsibility to provide public
goods, but debate continues about
the extent of that responsibility. ■David Hume
The epitome of the “Scottish
Enlightenment,” David Hume
was one of the most influential
British philosophers of the
18th century. He was born in
Edinburgh in 1711, and from
an early age showed signs of
a brilliant mind: he entered
Edinburgh University at the
age of 12, studying first law
and then philosophy.
In 1734, Hume moved to
France, where he set out his
major philosophical ideas in
A Treatise of Human Nature.
He then devoted much of his
time to writing essays on
literary and political subjects
and struck up a friendship
with the young Adam Smith,
who had been inspired by his
writings. In 1763, Hume was
given a diplomatic role in
Paris, where he befriended
the revolutionary French
philosopher Jean-Jacques
Rousseau. He settled in
Edinburgh again in 1768,
where he lived until his death
in 1776, aged 65 years.Key works1739 A Treatise of Human
Nature
1748 An Enquiry Concerning
Human Understanding
1752 Political DiscoursesWhere the riches are
engrossed by a few,
these must contribute very
largely to the supplying of
the public necessities.
David Hume