Exploring the Dynamics of Private Provision of Public Goods
Paragraph 1
Mancur Olson was among the first economists who studied the private provision of public goods in detail: “It is of the essence of an organization that it provides an inseparable, generalized benefit. It follows that the provision of public or collective goods is the fundamental function of organizations generally…. There is no suggestion here that states or other organizations provide only public or collective goods. Governments often provide noncollective goods like electric power and they usually sell such goods on the market.” The coupling of private and public goods is one mechanism through which private enterprises can be enabled to provide public goods. In the eighteenth century, lighthouses were non-rivalrous and non-excludable public good. But port spaces were private goods. British lighthouses were financed by imposing dues on ship owners at the ports. A public good that is coupled with a private good is called an “impure” public good. Some shopping malls offer common spaces and infrastructure for which shoppers pay through supplements to the merchandise. If charging for parking is too expensive, parking becomes a public good, allowing non-shoppers to use it for free. If a nearby landowner builds a shopping mall without parking, they can offer lower prices and drive out competitors. To avoid this, the first mall owner can buy the surrounding land before free parking is allowed. This is known as "extending the role of the firm" to solve externalities.
Paragraph 2
Private provision of public goods may occur because people do not always act purely in their self-interest. Economic models often assume that individuals only care about the benefits they receive from a public good, but people also care about how the public good affects others. Donations to charity and political campaigns illustrate this behavior. Some models incorporate the notion that the act of giving itself provides additional satisfaction beyond the actual public good provided. A third reason for the ability of public goods to be provided privately is the existence of social norms. Social norms can encourage private provision of public goods. That a non-co-operative strategy is not necessarily optimal in repeated games is a well-known result in game theory. In repeated games norms like fairness and equality can increase private contributions. Social norms can motivate people to act altruistically but also help to solve co-ordination problems by specifying property rights and the terms of contracts. Clean streets can be regarded as a public good, and let us assume that littering isn’t punishable by law. In a game-theoretic setting, individuals would be expected to underproduce the public good, i.e., to litter too much. A norm not to litter can now help to induce people to co-operate and play the non-Nash equilibrium but Pareto superior strategy. The punishment of norm-violators through social sanctions will help to make people follow the norm without the government having to police norm following.
