Public Goods and Externalities

The inaugural question is this: What are the distinctions and relationships between positive externalities and public goods?

First, what are each of these concepts separately? Public goods, using the typology developed by Elinor Ostrom, has the features of being neither rival nor excludable. A good is rival if one person gaining benefit from it prevents another from gaining benefit from it. A good is excludable if it is relatively low cost to prevent another from accessing it. The combination of these two characteristics make public goods unique. It is high cost to prevent others from accessing the resource and the benefit any one person receives from the resource is not reduced by another gaining benefit.

Positive externalities are benefits generated by people engaging in production that cannot be exclusively claimed  by the person producing. In stricter definitions the goods in one person's output vector is included in another person's input vector without compensation or control by the government.

The prompt for this question emerged from a problem I encountered in specifying how to conceptualize voluntary hazard response. If someone does something to help themselves, and in the process creates benefits for others, then the concept is clearly an externality. If multiple people act to provide a general benefit for many including themselves then it is a public good. They seem related. Individual action creates benefits for others. But they are clearly separate concepts in other ways. What is the link?

My investigation led me to this piece by Holtermann from Economica in 1972. After initially defining both the above he immediately states that "not  all  external outputs  are public  goods." A good can be captured by many or by just one person. It is a characteristic of the output, not the source, that defines the good. Public goods production can indeed have externalities themselves that are not public goods. The provision of defense can create benefits in other countries under the umbrella of our defense that can be internalized by that country. The public good of in-stream flow generated from a group upstream can allow for personal capture and benefit of an actor downstream.

The answer I find is both complicated and simple. An externality is any good or bad output that others include in their input. Public goods are described by their own characteristics, not from their source and destination. Many things provided without human intervention are public goods. Air is a public good not generated by individuals. Therefore public goods are not reliant upon or all externalities.

However if a public good is going to be intentionally provided it will be the result of actions that generate externalities. If I pay for the army then my output is on my own and others' inputs as benefits. But externalities can be public goods unintentionally provided for.

So the conclusion I end on tonight is that externalities can be public goods and public goods can be generated as externalities, but neither is a necessary condition of the other.