Economist Writing Every Day

Joshua Hendrickson recently wrote about the provision of public goods, and how we teach public goods in economics. My post today is not so much a reply to Hendrickson, but is inspired by his mediation on public goods as I gear up to teach another semester of Public Finance.

The theory of public goods that economists discuss among themselves is pretty straightforward: when a good is both non-rival and non-excludable, there is a strong case for government intervention of some sort (though not necessarily public provision). The opposite is true when a good is both rival and excludable: there is a strong case for laissez faire.

Seems simple enough, right? But communicating this concept to undergraduates and the general public has been a major challenge. Part of the confusion arises from the term itself, “public good.” Non-economists tend to use the term interchangeably with the notion of “the common good, as is clear from Wikipedia, a dictionary, or a conversation with your grandma. For this reason, I sometimes substitute the awkward phrase “collective consumption good” (this is actually Samuelson’s term in his classic article on the topic), but all the textbooks so use it so I often default to the standard terminology.

But I think there’s a deeper problem than just terminology. Economists have put themselves in a box. Literally. Here’s a standard 2×2 matrix from Jonathan Gruber’s undergraduate public finance textbook. I don’t mean to pick on Gruber here — this is a pretty standard presentation. You can find it in many microeconomics textbooks too, or on Wikipedia. Everything goes in a box! It’s a nice stylized way to think of the terminology. It makes for nice test questions. But here’s the real problem with it as a pedagogical tool: it doesn’t seem to help many students! Or at least, it doesn’t seem to help them retain the knowledge between their micro principles courses and upper division courses (at least in my experience, I’d be happy to hear others chime in here).

So how can we teach this concept better? I have a few ideas. I’d like to hear yours too.

First, I think there are actually ways to use that simple 2×2 matrix and make it more useful. Here’s one example in Greg Mankiw’s principles text. Mankiw uses the standard 2×2 matrix, but instead of just a single good to represent each good, he uses a few goods. But most important: he puts roads in every box. Now, this potentially has the possibility to even further confuse students. But I think that used correctly, and properly explained, it can actually give students a deeper understanding of the concept.

Whether a good falls into a private or public good box, or one of the off diagonals (we’ll save those for a future post!) is not dependent just on the physical characteristics of the good. Policy choices, the institutional setting, and consumer demand all interact. Also, whether the owner of the road chooses to put a toll on the road can also determines what box it belongs in. Traditionally, by excludable we might mean something like “is it cost effective, given current technology, to charge the users of the good?” But in the real world of policy, there are other considerations.

Here’s one other effective use of the same general diagram, but with a twist: no more boxes! This is from Randy Holcombe’s public finance textbook (which I think is out of print now). I like this because it treats the two conditions of rivalry and excludability as continuous variables, rather than dichotomous. In other words, on the question of rivalry, some goods become congested more often/easily than others. It’s not really an either/or question. Like Mankiw, he also distinguishes between different types of roads: city streets vs. interstate highways. Again, it’s not the physical characteristic of a good that matters (they are both just pavement with lines painted on them), but other institutional factors matter too.

So which of these diagrams is best? I actually try to use versions of each them when teaching my undergrad Public Finance course. That might be too much for an intro course, but if students have seen the concept before, I think presenting multiple perspectives on it is a good way to reinforce the topic and give them a deeper understanding.

A few closing thoughts and links, that are more directly inspired by Hendrickson’s post. A local anecdote on municipal golf courses (which he uses as an example): Little Rock recently closed two public golf courses for budgetary reasons. Sometimes, government agencies do act similarly to private companies! For public provision of fire departments, at least in US history there is a very clear reason: it was a way for firefighters to capture rents and for politicians to distribute patronage. The efficiency of private vs. public provision wasn’t really under debate.

Please share your ideas in the comments!