The problem of public goods

Public goods are goods that are both non-excludable and non-rivalrous. This means that the use of such a good by any individual does not prevent others from using the good and does not reduce the amount of the available good in the economy. Given this definition it becomes evident why the market mechanism doesn’t work for public goods; the market only works well for goods that have an exchange value. Since public goods are not scarce it is impossible to establish an exchange value for “1 unit” of a public good in relation to other goods in the economy. But as we’ll later see, it is possible to determine the impact a public good has on the economy as a whole or on specific sectors in the economy — possible, though not necessarily simple or easy.

There are several strategies to try and capture the value of public goods within the market mechanism, but as we shall see, all existing solutions either result in economic inefficiency or produce perverse incentives:

Patents, copyright, subscription and licensing: the primary strategy to capture the value of public goods in the market is by giving the creator of the public good monopoly power over who gets to use or copy the good, thus turning a non-excludable and abundant good into an excludable and scarce good. Once the good is scarce it can be valued within the market. This strategy allows the creator of the good to capture some value from the good but it comes at significant costs and is limited in its application and enforceability.

  • Economic efficiency: while this strategy allows a creator to be compensated for their work, it comes at the cost of reduced economic efficiency, since a good that could have been accessible to everyone at virtually no additional cost — an abundant resource — is now only accessible by some. This strategy also stifles further innovation in the area as the original creator can restrict others from capturing value from derived work. Not only does this strategy reduce economic efficiency by turning an abundant good into a scarce good, but it also requires ongoing expenditure of resources to preserve the scarcity of the good (and maintain the monopoly power of the good’s creator). In the case of software licenses, for example, various techniques must be implemented to prevent unauthorized individuals from using or copying the software. This is often a never-ending cat-and-mouse game (and thus a never-ending drain on resources), where developers continually design new security schemes that are then promptly foiled by hobbyists and hackers. In addition to private resources, public resources must also be continually expended within the legal system and on law enforcement to preserve the creators’ monopoly power.

  • Limited application: in addition to its economic inefficiency, the strategy is only effective for a subset of public goods (and for a subset of regions). Consider for example a team of researchers that has been working on a cure of a particular disease. After a few years of work the team finds a cure that can lead to extending the lives of 5 million people. Now consider 2 scenarios: in both scenarios the amount of effort by the team is the same and the impact on people’s lives is the same. The only difference is that in Scenario 1 the cure is in the form of a pill, and in Scenario 2 the cure is in the form of a combination of carefully measured ingredients that are readily available in stores. Based on this difference alone, in Scenario 1 the team could be making billions, while in Scenario 2 the team may be struggling to cover the costs of conducting the research. The reason for this disparity has nothing to do with the additional effort to produce the pill — it could have been a simple (but non-obvious) tweak to an existing pill. It has everything to do with enforceability — it’s relatively easy to penalize a pharmaceutical company that illegally manufactures a pill; it is however impractical to track and penalize millions of people who “illegally” buy ingredients in specific amounts from stores. Now you may say that the team in Scenario 2 can still make money by writing books about their discovery and getting good paying jobs thanks to their research. This is true, but these are all options that are also available to the team in Scenario 1! Just like the strategy can only be practically enforced in some cases, it may also not be uniformly enforced everywhere. Countries may have different IP laws, or may not recognize IP claims from another country. Similarly, countries may have limited capacities in enforcing such laws, and pursuing IP claims in such countries may be futile.

Advertising: while the advertising model should produce economic efficiency in the distribution of public goods (since no one is excluded from consuming any content), in practice it creates inefficiency in the production of public goods due to the perverse incentives created by this model.

  • Perverse incentives: since the market mechanism cannot monetize abundant resources, the advertising model monetizes a scarce resource instead: people’s attention. The problem is that there is no obvious relation between the quality of content and its popularity; a scientific breakthrough may have incredible value but may only catch the attention of a few dozen people. On the other hand, an inane tweet by a celebrity may generate millions of views. Content that grabs the most attention tends to be emotionally charged; surprising, outrageous, divisive, or hateful content tends to generate a lot more attention than emotionally neutral or factual content. It also takes a lot less effort to generate factually-inaccurate outrageous content than well-researched quality content — making such content easier to monetize. At the same time, social media platforms design their algorithms to maximize profitability; they direct audiences toward content that would make them stay on the platform longer to watch more ads. Since everyone in the Attention Economy is competing for limited advertising money, everyone has the incentive to produce (and in the case of platforms, promote) low-quality, attention-grabbing content — not high-quality content. The result is that while content creators in the Attention Economy are technically able to monetize content that is available for all to access as a public good, they are in fact economically incentivized to create toxic and socially polarizing content — the exact opposite of a public good!

Last updated