The last market imperfection that we will look at is "public goods." The name is misleading. When economists speak of public goods, they are not talking about goods that are produced by the public sector (though oftentimes these goods are). Rather, the adjective "public" is used to distinguish those goods that are not "private" goods. A private good is a good like a hamburger. When you take a bite out of a hamburger, that's one less bite that is available for somebody else to consume. Contrast this with a football game. When you watch a football game on TV, there's just as much of that football game available for somebody else to watch (consume).

In fact, from the perspective of maximizing society's happiness, WE CAN THINK OF PUBLIC GOODS AS GOODS THAT ARE CHARACTERIZED BY POSITIVE EXTERNALITIES. Suppose you are both an avid football fan, and a very wealthy individual. You love football so much that you arrange with the owners of the Dallas Cowboys and the San Francisco 49ers for their two football teams to come to your home and play a scrimmage in your backyard. Chances are, once your neighbors hear about it, they also will want to watch the game. In other words, though you arrange to watch the game in your backyard for your private benefit; your neighbors expect to receive an external (third-party) benefit. And that's okay with you. After all, if they want to come and watch, it will not diminish your pleasure. As long as the amount you are willing to pay is greater than the cost of putting on the game, society's happiness is increased. Your neighbors' happiness is just icing on the cake.

But suppose your willingness to pay isn't large enough to pay the costs of putting on the game. As a result, no game is held in your backyard. What happens to society's happiness then? This case is almost identical to the example of the landfill liners of the previous chapter. If the external benefits received by your neighbors--like Mr. and Mrs. Clinton, Mr. and Mrs. Thomas, and Mr. and Mrs. Hydro--are sufficiently large, then society's happiness would be increased if you arrange the game. The problem here is that you don't "feel their joy" in deciding to schedule the game. In doing what is in your interest, and by not considering the spillover benefits to your neighbors, your action no longer maximizes happiness.

THE PROBLEM WITH PUBLIC GOODS, LIKE THE PROBLEM WITH POSITIVE EXTERNALITIES, IS THAT THE PRIVATE SECTOR WILL PRODUCE TOO LITTLE OF THE GOOD. Too few resources will be withdrawn from other activities and directed to the production of this good. And that's a shame. Society will miss out on an opportunity to increase its happiness.

It's important to note that private markets are not completely helpless in dealing with goods that have positive spillover benefits. Profit-seeking entrepreneurs will try to figure out some way of "capturing" the externalities from public goods. For example, one thing you could do to capture the spillover benefits received by your neighbors from the Cowboys-49ers scrimmage is build a high wall around your property and then charge admission for those who wanted to see the game. Then you could begin to "feel their joy." The revenues you collect would provide information about the amount of pleasure your neighbors received. If the sum of these revenues and your own willingness to pay was larger than the costs of putting on the game, you would find it in your interest to arrange the football match. You would have a private incentive to act in the public interest. In essence, building a wall and charging admission has turned the third party--your neighbors--into direct participants in the economic transaction. It has allowed you to internalize the external benefits associated with hosting the game. The "public" good has been "privatized."

Many times, however, private markets aren't able to capture the external benefits from public goods. For example, take jokes ("Take my wife...please"). A paying consumer (let's call her Mary) goes to a comedy club and pays admission to hear a professional comedian tell jokes. Mary's willingness to pay is a measure of the happiness that she expects to receive from the show. But consider what happens after she returns home from the club.

The jokes Mary heard are still able to be enjoyed by others even after she has "consumed" them. Suppose she tells her friends--Laurie Clinton, Lisa Thomas, and Jennifer Hydro--some of the funny stories she heard. And they get a big guffaw from hearing the comedian's jokes. While Mary may consider these people her friends, from an economist's perspective, they're just third parties to a resource transfer. They are getting a benefit from the comedian's jokes without having to pay for it. As a result, the revenue the comedian receives from producing jokes does not reflect the pleasure Mary's friends receive. Like all goods with positive externalities, this is likely to result in too little of the good being produced. Society is a little less happier--and a little less funnier--because the price system has failed to report the full pleasure that consumers receive from this comedian.

Note how difficult it would be for the comedian to internalize these external benefits. He would have to assign a private detective to each paying consumer to follow them around after the show. Every time Mary told one of the comedian's jokes to a friend, the detective would have to collect money from the person who heard the joke.

DETECTIVE: "Excuse me, ma'am, I'm from the Comedy Club and that joke's going to cost you five dollars."

MARY'S FRIEND: "Five dollars, you've got to be joking."

DETECTIVE: "No, ma'am, that's not my job. My job is to collect money for the people who are joking."

Clearly, it is not practical for the comedian to do this. At least by performing in a club and charging admission at the door, the comedian is able to capture some of the benefits from producing this good.

For other types of public goods, even this isn't practical. Consider a road in a downtown area of a major city. After one consumer uses the road, there is still plenty of road available for another consumer to use. A private entrepreneur might try to charge each of the users of the road a fee, but imagine what a mess that would be. Every time one turned the corner from one street to another, there would be a tollbooth to collect money from drivers. Just think of the traffic jams this would cause during rush hour as cars queued up to pay tolls at every corner!

In summary, because public goods produce positive spillover benefits, there arises a problem in how to get people to pay for the benefits they enjoy. An alternative to the methods discussed above is voluntary contributions. However, this raises the famous "FREE RIDER PROBLEM" which is the topic of the next chapter.