3. Problems related to the consumption of common and public goods

A notable feature of public and common goods is that free markets produce less of them than is socially desirable. This is because public and common goods suffer from, what is called, the free-rider problem. The free-rider problem is a type of market failure that occurs when those who benefit from goods or services do not pay or under-pay for them.

At the same time, it is impossible to exclude non-payers from accessing or using these goods. Thus, the public and common goods may be under-produced, over-used or become degraded. Furthermore, if the marginal cost of serving one more customer is essentially zero, it is socially optimal to offer the product at a zero price. Therefore, producing public goods is not a business model, which is why private markets do not have an incentive to provide them.12

As public and common goods have no supply in the market sense, their price is not formed on the market. There is a demand for these goods in society, as a result of which the value of these goods can be assessed. The higher the value of these goods in society, the greater the demand and the greater the pressure on the consumption of these goods, which ultimately leads to the over-consumption of public and public goods, which G. Hardin (1968) explains as a “tragedy of common good”. 

“Tragedy of the commons” is an economic problem in which every individual has an incentive to consume a resource at the expense of other individuals. It results in overconsumption, underinvestment, and ultimate depletion of the resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer consume. “Tragedy of the commons” occurs when individuals neglect the well-being of society in the pursuit of personal gain. 13

Overconsumption of public goods leads to pollution and pollution damage. Pollution is the introduction of contaminants into the natural environment that cause adverse change or pollution damage. Pollution can take the form of chemical substances or energy, such as noise, heat or light. Many activities that are useful to people produce pollution: burning coal to create electricity pollutes the air; both industries and homes generate garbage and sewage that can pollute the soil and water; pesticides leach into groundwater, rivers and lakes and harm wildlife.

Polluted air, soil, and water cause different pollution damages, for example, various human diseases, damage to buildings and structures, destruction of nature, etc. Pollution damage in monetary terms is called external cost. More specifically, an external cost is a cost that an individual, company or community incurs as a result of an economic transaction in which they are not directly related.14 Therefore over-consumption of public and common goods that leads to external costs may result in reduction of the well-being of society.

Economists suggest two ways to address the free-rider problem and the problem of external cost: 

• According to the Neoclassical approach, the government should organize the conversion of public and common goods into private goods.
• According to the Keynesian approach, the government should organize the distribution of public and common goods itself, using various “command-and-control” measures.

The decision as to how the government should intervene in the provision of public and common goods should be based on an analysis of whether the benefits of consuming those goods outweigh the costs to society of taxation. However, such an analysis is not always carried out, instead it is decided by those in political power. The following chapters describe different policy approaches to organizing the distribution of public and common goods.

12 ThoughtCo. Social Sciences (12.10.2020)

13 Hardin, G. (05.05.2020)

14 Economics Online. External costs. (12.05.2020)