Mainly, we could define two kind of goods: Private and Public. The main difference between them is that, the first is characterized by having a high level of subtractability. In short, that means that if someone consumes the good, the quantity available to others is reduced. And excludability, which is that the use of the good is restricted by the producer to those people who are willing to pay the amount they are willing to accept. Thus, those who doesn’t reach this requirement are excluded.

On the other hand, Public Goods are characterized by containing a very low level of subtractibility and excludability. Low subtractability means that a good is available to all consumers at the same time, and consumption by one consumer doesn’t reduce the supply available for another consumer. Low excludability mainly implies that one can’t be easily excluded from consumption. For instance National Security, which is available to all citizens of a country simultaneously, also culture or knowledge are pure Public Goods.

Why is it difficult to know how much to charge you for Public Goods?

According to the definition given above, determining exactly how much you should pay for Public Goods could be very complicated. Why? In the case of private goods, there are different indicators such as costs, markup prices, etc. But trying to apply same rules for Public Goods could be impossible, otherwise how do we know the real cost of National Security, a Mathematical Theorem or a Nation’s culture?, or how can we measure how much of the ozone layer do we consume and how much are we willing to pay for it? In other words, how can we determine Demand for a Pure Public Good?

Of course, for those Public Goods that can be provided under public or private ownership, there exists mechanisms to help to “Reveal Demand” (such as Clark’s tax, Insurances and Veto Power, for a deeper lecture I’d recommend Buchanan) so as to make every consumer to pay according to his “willingness to pay”.

Unfortunately, as many things which are perfect in theory, but could be impracticable when you try to apply them in the reallity, and it’s almost impossible getting an efficient outcome (though, not for that you stop paying for it).

Then, what about those goods that are not supplied either under private or public ownership such as the Ozone layer, gravity or the air we breath?

Simply, this kind of goods, which also we can’t avoid their consumption, are priceless. This is why we don’t have to pay a tax upon the amount of oxygen you consume per day, unless until now.

By Laura M. Gonzalez