2 - The Theory of Public Goods and Their Efficient Provisions

Abstract

This chapter explains the economic theories of public goods, global public goods, and their efficient provisions. Fundamental concepts of a public good, a global public good, a club good, and externalities are described. Distinct characteristics of a range of problems of public goods are described, with an emphasis on the salient examples of public goods with regard to environmental qualities that have received much public attention in the past. The author explains a Pareto optimal provision of a public good as well as a market provision that results in inefficient resource allocations. The policy instruments that were developed to correct for market inefficiencies and externalities are elaborated: a corrective price, standards, a cap-and-trade system, and other less theoretical approaches. The need and difficulties of a cost–benefit analysis for policy interventions are evaluated. Experiences with and evaluations of these policy interventions with regard to problems of various public goods are reviewed. The chapter ends with the introduction to the policy problems of global warming, which are dealt with exclusively in the next chapter.