Goods, Property and Externalities

Basic economics partitions goods into private goods and public goods, and property into private property and public property. Private goods are defined as those goods that are rival — one person’s consumption of the good  reduces the amount available for others to consume — and excludable — a person can be prevented from consuming the good. Thus a cookie is a private good. A cookie eaten reduces the stock of cookies, and cookies can be locked up.

In contrast to private goods, public goods are non-rival and non-excludable. The services of a lighthouse is an example of a public good because one person’s use of the lighthouse signal does not affect the use of the signal by others, and people cannot be prevented from seeing the lighthouse signal.

Now about private and public property. Private property is that which is owned by some private individual or a private collective. Your car is your private property, and a fleet of cars is the private property of a rental agency. Public property is what is collectively owned by a public collective, such as a municipality or the state. Public lands are public property. They are often termed “commons” when everyone has access to public property such as a fishery (anyone can catch fish) or grazing grounds.

It is important to keep in mind a salient distinction between goods (by which we mean both goods and services) and property. Economics dictates what are public and private goods. Goods are either  private or public independent of the laws of a land. You cannot pass a law to change private goods into public goods, or vice versa.

In contrast to that, whether some property is public or private depends on the law of the land. For example, the government can declare privately owned things to be publicly owned by “nationalizing” them. Ownership can be transferred by the government just like a robber transfers ownership of property.

Given the above, we deduce the following. Private goods can be either privately owned or publicly owned. There is no rigid link between the nature of a good (whether it is a public good or a private good) and the ownership of the good, or even the provision of a good. You can have private goods produced privately but financed publicly, and so on.

Thus you can have public good (lighthouse services) owned privately or publicly. Or you can have a private good (a stock of food) owned publicly (the government stocks food and distributes it according to its whims.)

Private goods can be publicly produced (government producing cars) and public goods can be privately financed and produced (such as private lighthouses.) Education is a private good that can be produced both privately or publicly, and finance privately or publicly.

One more concept that needs to be defined here is “externality.” An unintended effect of an activity is an externality if it affects someone other than the agents engaged in the activity.

The noise disturbance my neighbor suffers when I have a loud party in my apartment is a negative externality to him. The beauty of my lovely garden in my backyard is a positive externality to my neighbor. If I am in the middle of nowhere, my actions do not cause any externalities. I can party all I wish and not bother anyone.

Externalities are therefore socially determined. Smoke from a chimney is smoke from a chimney. In the middle of nowhere, it’s not a negative externality; in a crowded neighborhood, it’s one. If you pee in a mountain stream, seven miles downstream the water gets naturally clean. If a few thousand people pee in the stream, it gets polluted and is a negative externality.

Let’s examine two goods specifically here. First, primary education. Here I define primary education as the basics that have to be taught to, and learned by, every person in the modern world. They are literacy and numeracy, and the fundamentals of logic. To function in the modern world, a person has to have the ability to learn (comprehend the written word), to communicate (write), do arithmetic (comprehend numbers), and reason competently. If you fail to learn those things, you are handicapped because you cannot be productive without those abilities.

Higher education is a private good in the sense that the benefits of education accrue to the person. If you get yourself a degree in computer science, your lifetime increases over what it would have been without the degree. There are some spill-over effects of higher education in that your higher productivity spills over to the economy (minuscule though it may be.) But primary education has much larger spill-over effects that significantly improve the economy.

The position that primary education should be subsidized rests on that recognition that it has positive externalities. Opinions can differ, however, whether that subsidy should be publicly or privately provided. Should private charities fund it, or should the subsidy be tax-funded? We’ll address that later.

For now, the second good we look at is public health. An informal definition of public health would be that aspect of health of the public that has externalities. If a person gets a toothache, he cannot pass it on to the next fellow. It’s a non-communicable health problem. But if a person gets measles, the spill-over effect will hurt others. Thus the public funding of health measures to treat and contain communicable diseases is justified.

The questions then would be: should public health be tax-funded, and if so should public health be privately provided or publicly provided? Or should civil society be the agent that funds and provides for public health?

The answers to those questions are non-trivial and consequential. It depends on the “health” of the government, the private sector, and the civil society. Different societies, therefore, would arrive at different answers.

In a society of libertarians (such as one that I would like to live in), the answer is straightforward. The government or the state should be barred from the funding and provisioning of primary education and public health. That means, the funding and provisioning of those two issues must be restricted to the voluntary sector — meaning the market and the civil society.

Looking at the world using these concepts helps us understand how our world works, or fails to work. And it helps us in our endeavor to improve the world, and hinders us from making a bad situation worse.

Bonus Point:

Are lighthouses private goods? Yes, they are. It’s after all, just a tall building with large windows and a big, fat, rotating light on top. The beam of light that comes out is a public good, not the lighthouse.




Author: Atanu Dey


2 thoughts on “Goods, Property and Externalities”

  1. Atanu, thanks a lot for this post.
    One doubt regarding the following paragraph of yours:

    “In a society of libertarians (such as one that I would like to live in), the answer is straightforward. The government or the state should be barred from the funding and provisioning of primary education and public health. That means, the funding and provisioning of those two issues must be restricted to the voluntary sector — meaning the market and the civil society.”

    Even in a society of libertarians, an individual may make a choice causing big harm for small personal gain. For example, running away from quarantine-home due to unsatisfactory food choices (say). Government being the sole monopolist of violence, will you not need the government to step in here?


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