Discrimination and Efficiency in the Pricing of Public Goods

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IT is widely accepted that public goods will generally be inadequately supplied and/or consumed if left to a private-pricing scheme (one in which the seller receives what the buyer pays). There are two cases to consider: one where exclusion is impossible or prohibitively expensive and the other where it is commercially feasible to practice selective exclusion. In the case of nonexclusion, the compelling argument against a private-pricing scheme is that no supply will be forthcoming, especially in large-number settings. Since each consumer can benefit from the public good that someone else pays for, the prevailing sentiment is to pretend no desire for the good and hope for a free ride. The problem is aggravated in the large-number case by the fact that each individual's share of the total benefit is small relative to cost. Therefore, the private supplier of the good will find little demand for his product at positive prices. While it is possible that these problems can be overcome through voluntary action, if the number of relevant decision makers is small, optimism on this score is undoubtedly misplaced in the vast majority of cases. When exclusion is commercially feasible-the case we will be concerned with throughout this paper-we can generally depend on private pricing to motivate a positive output of a public good.' When a person can be denied the benefit of a public good unless he pays a predetermined price, he ceases to realize any advantage from obscuring his demand for the good. In this