A Theory of the Theory of Public Goods

A public good, as defined by economic theory, is a good that, once produced, can be consumed by an additional consumer at no additional cost. A second characteristic is sometimes added, specifying that consumers cannot be excluded from consuming the public good once it is produced. Goods with these characteristics will be underproduced in the private sector, or may not be produced at all, following the conventional wisdom, so economic efficiency requires that the government force people to contribute to the production of public goods, and then allow all citizens to consume them. Simple observation of the real world suggests two problems with the application of public goods theory as a justification for government production. First, many public goods are successfully produced in the private sector, so government production is not necessary. Second, many of the goods government actually does produce do not correspond to the economist's definition of public goods, so the theory does a poor job of explaining the government's actual role in the economy. If public goods theory fails as a theory of public expenditure, why is it so firmly entrenched in the economic theory of the public sector? This paper develops a theory to explain the development and use of public goods theory as a justification for government production. The paper begins by examining the theory of public goods. Public goods certainly exist, in the sense that there are goods that fit the economist's definition of public goods, but production in the public sector is neither necessary nor sufficient for the efficient production of public goods. A model that explains government involvement in the economy is then presented. Within this model, the production of national defense is explained as an institution that enables the government to protect and enhance its own wealth. Following this reasoning, national defense is produced by government because it furthers the private interests of those who run the government, not because it is in the public interest for the government to produce public goods. The model in this paper has more