The purpose of this study material was to provide an overview of how different types of social welfare states define what constitutes optimal provision of public and common goods, and solve the free-rider and external cost problem. To achieve the goal, the meaning of well-being was explained. The simplest definition of well-being is just feeling well. Well-being can be achieved by satisfying the needs and / or eliminating the unnecessary desires.
American psychologist Abraham H. Maslow explained that human well-being is based on meeting people’s physiological and safety needs. When basic needs are satisfied, a person strives for realizing their social needs. In economic terms, meeting needs requires the consumption of different types of goods.
Based on the features of rivalry and excludability, goods are divided as private, club, common, and public goods. The market economy is relatively successful in providing private and club goods, but fails in the provision of public and common goods. In terms of a market economy, public and common goods are a market failure, which means that the private sector does not provide these goods and services. The consumption of common and public goods is coupled with the free-rider problem, which leads to over-consumption of these goods and finally causes external costs to society.
To solve the above-listed market failures the government must intervene. Economists suggest two ways:
- 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.
How governments organize the provision of public and common goods depends on the governmental policy approach to social welfare. A liberal welfare state prioritizes economic growth that enables most citizens to ensure their own well-being. A social-democratic welfare states seek to eradicate poverty, and strive to promote social equality. This system is characterised by high social spending.
The country’s population is concentrated in a universal insurance system, from which earning-based support and universal social services are distributed. In a conservative system, the market as a potential guarantor of well-being is marginalized, and social rights are not included as elements required for achieving well-being. The main idea is that the state intervention is minimal, with a focus on cash benefits that allow the welfare services to be provided by families.
Countries and associations of countries use a wide range of indicators to measure the results and effectiveness of their social policies. Examples of such indicators are GDP, the Ecological Footprint, and the OECD survey “How’s Life?” etc. The results are used by countries to shape their social policies in an effort to combine the provision of public and collective benefits in a way that increases the well-being of their citizens.
