|Abstract||Many economists consider public goods to be a case of market "failure.’ They argue that the free market cannot finance the optimal amount of public goods. Therefore, they say, the government must finance their provision. In this paper I shall challenge this view. Three well—known arguments supporting this view will be presented and critically examined. The definition of public goods to be used in this paper is those goods that are characterized by both nonrival consumption and nonexcludability. These are the so-called "pure” public goods. The three arguments that I shall challenge, however, focus on the nonexcludability characteristic. ln addition, I shall assume that large numbers of people are involved and therefore that transactions costs are high. By making such extreme assumptions I wish to disarm the strongest case in support of government financing of public goods and to put to rest this particular "rnarket failure" justification for government economic activity. One argument which criticizes the free market`s ability to provide public goods is a basic one. This argument states that because a public good’s provision costs exceed its benefits for each individual concerned, a voluntary arrangement must be made among those individuals to provide the good collectively. But when large numbers of people ar involved, transactions costs are high. If the good is being provided via voluntary arrangement, there is an incentive for individuals to become free 1iders—to refrain from paying their full share of the costs of providing the public good (or their full share of the future costs of provision) and, instead, to let others pay. Owing to imperfect exclusion from consumption, free riders can enjoy the good’s benefits without contributing anything toward its costs. The second argument states that since individuals will tend to become free riders because of the presence of a free-rider incentive, a less than optimal amount of the good, at best, will be provided in the free market..|
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