1. ALTERNATIVE
DELIVERY METHODS
OF PUBLIC GOODS
Prof.Dr.Coskun Can Aktan
Dokuz Eylul University
Faculty of Economics & Management
&
Social Sciences Research Society
http://www.sobiad.org

2. BACKGROUND
 The theory of public goods was first developed and
debated by the continental public finance
economists, notably Ugo Mazzola, Knut Wicksell,
Erik Lindahl, Emil Sax and others. However, the
theory of public goods stayed in its infancy until the
1950's. Modern public goods theory can be
attributed to Paul A. Samuelson.
 Following Samuelson, other important contributions
to the public goods theory were by R.A.Musgrave
and J.M Buchanan. Their contributions were the
cornerstones of the modern public goods theory.

3. DEFINITION
 Samuelson's definition gives two characteristics of
public goods: Indivisibility ("...can not be parcelled out
among different individuals") and Joint Consumption
("all enjoy in common."). The result of those two
characteristics is that once a public good, in
Samuelson's terminology "collective consumption
good" is produced, any given unit of the good can be
made equally available to all. According to the definition
of Samuelson, extention of the supply to one individual
facilitates its extention to all. In other words, supply of a
given unit to one individual, and supply of the same unit
to other individuals are clearly joint products.

4. The goods can be classified mainly into
two groups
 Pure goods and impure goods . A pure public
good, what Samuelson calls "collective consumption
good" has mainly two characteristics: Indivisibility
and non-exclusion. Indivisibility refers to the utility of
a good which can not be parcelled out among
different individuals.
 Since a pure public good is consumed collectively, it
is impossible to exclude some individuals to benefit
them. For example, exclusion is infeasible for such
goods as air pollution control, street lighting,
national defense, broadcasting TV, law and order
etc.

5. Pure Public Good
 Professor James M. Buchanan, in his classic book
on public goods gives the orthodox definition of a
pure public good.
 According to the orthodox analysis of public goods,
the polar case of a pure public good is pure private
good which is defined as "divisable" and
"excludable.”
 A pure public good has some other characteristics
that a pure private good usually has not. These are:
 Externality,
 Free rider poblem
 Forced rider

6. External Economies-Free Rider-Forced Rider
 External economies are defined as the consumption and/or
production activities of an economic unit which affects, the benefit/and
or cost functions of other economic units either positively or negatively
 Another important characteristic of a pure public good is that a
"free rider" problem. Individuals do not need to reveal their
preferences concerning which pure public good should be provided,
since they know that even without revealing their preferences they
benefit from services.
 On the other hand, a pure public good may have a "forced rider"
characteristic: The term of "forced rider" explains that the supply and
the demand for some particular public goods may be obligatory.

7. Impure Goods
 Basides the polar cases of pure goods -that
is pure public and pure private -there are also
some other type of public goods. The other
type of goods under the rubric of "impure
goods".
 "Club goods", "common-pool goods” and
"merit/demerit goods" are the main types of
impure public goods.

11. Main Characteristic of a Club Good
 A club good is an impure public good whose
benefits are excludable, but partially nonrival. The
main characteristic of a club good are two:
 1.Excludable benefits: An exclusion mechanism
could be installed at a reasonable cost.
 2.Partially non -rivalness: Benefits are shared by
club members. In other words, there is no rivalness
among club members.
 Club goods can be classified into two groups; quasi-
public goods and toll goods.

12. Quasi Public Good
 A quasi -public good is akin to the pure
private good in the sense that it has both
divisibility and exclusion features. However, a
quasi -public good generates either positive
or negative external economies. As a matter
of fact, externalities are the distinguished
feature of a quasi -public good. Education
and health are two main examples of quasi -
public goods.

13. Toll Goods
 Another type of impure public good is "toll
goods" or it can be called "exclusive club
goods". Toll goods are partially indivisible
(non-rival) goods whose benefit are shared
by club members. Exclusion mechanism
could be installed in return for a fee or a user
charge, that is "toll".

14. Common Pool Goods
 Common-pool goods, on the other hand are
divisible, however exclusion is difficult or
sometimes expensive to implement. There is
no need of payment to obtain or to use this
type of goods.
 Fishing in the sea or ocean, extracting
minerals from nature, hunting in wild
mountains or jungles etc, are some examples
for common pool goods.

15. Merit Goods and Demerit Goods
 Merit goods and Demerit goods are another type of
public goods. The concept of merit goods or "merit
wants" was first introduced by R.A. Musgrave.
 "...Merit goods may be defined as those of which,
due to imperfect knowledge, individuals would
choose to consume too little. Symmetrically,
"demerit" goods may be defined as those of which,
due to imperfect knowledge, individuals would
choose to consume too much."

16. Table: 1 Merit/Demerit Goods and
Externalities.
Type of good Emerging Externalities Government Intervention
Merit Goods Positive Externalities 1. Encouraging production by
Grants
2. Encouraging consumption
by voucher system
3. Tax incentives
Demerit Goods Negative Externalities 1. Discouraging production by
Pigovian taxes
2. Regulation on both
production and consumption

18. Table IV-1: Public Goods And Their Characteristics
Type of
PublIc
Goods
Divisibilit
Rivalry)
Indivisibility
(Non-rivalry)
Exclusion/
Non-
exclusion
External
Economies
Economies
of Scale
Free Rider Forced
Rider
CHARACTERISTICS OF GOODS AND SERVICES
PURE GOODS
1.Pure public
Goods
(Inclusive club
goods)
Examples:
defense against
nations,
judiciary
Indivisible Joint
consumptio
n
non-
excludable
May occur
May
occur
Free rider
problem may
occur.
Individuals with
out revealing
their
preferences
benefit from
services.
Individuals may be
forced to demand
some services.
Conscription and
elementary
education are
examples.
2.Pure Private
Goods,
Examples:
Shoes, bread,
automobile,
Divisi
ble
Individual
consumptio
n.
Excludable
.
Do not
occur. Or it
hardly
occurs.
May
occur
There is no
free lunch.
Individuals are
free to demand for
goods and
services.
Source: Aktan, 1992: 31-32

19. Table- IV-1: (Continued) Public Goods And Their Characteristics
CHARACTERISTICS OF GOODS AND SERVICES
Type of
PublIc
Goods
Divisibilit
y
Rivalry)
Indivisibi
lity
(Non-
rivalry)
Exclusi
on/
Non-
exclusi
on
External
Economies
Economies
of Scale
Free
Rider
Forced
Rider

20. Impure Goods
3.Exclusi
ve Club
Goods
3A.
Ouasi-
Public
Goods
Examples:
Education,
Health etc
Partially
Indivisible
Individual
or joint
consumpti
on.
Exclusion
mechanis
m could
be
installed in
return for
a fee.
Occurs.
External
economics
are the
basic
feature of
these
types of
goods
May occur No free
rider
Individuals
may be
compelled
to
demand.
Contagiou
s disases
are
examples

21. Impure Goods
3-B.Toll
Goods
(Exclusive
club
goods)
examples:
Power,
gas, water
supply,
turnpike
highways,
cable
TV.etc.)
Partially
Indivisible
Individual
or joint
consumpti
on.
Exclusion
mechanis
m could
be
installed in
return for
a fee
May occur Occurs.
Economie
s of scale
is a basic
feature of
these
goods.
No free
rider
No forced
rider
3-B.Toll Goods

22. Impure Goods
4.Commo
n-pool
Goods
Examples:
Fish in the
sea,
minerals in
the ocean
etc.)
Divisible Individual
or joint
consumpti
on
Exclusion
is difficult
to
implement
.
May occur May occur. There may
be free
riders.
No forced
rider.
4.Common-pool Goods

23. Impure Goods
5.Merit/Demerit Goods
5.Merit/De
merit
Goods
Examples:
elementary
education,
help for
poor, elderly
etc.
Examples
for demerit
goods:
Alcoholic
beverages,
drug use
etc.)
Divisible Induvidual
consumptio
n.
Excludable
Merit goods
spread
external
economies.
Demerit
goods
spread
external dis-
economies.
May occur There may
be rent
seeking
eftorts.
Individuals
also may
fight to
obtain a free
lunch
Forced
rider.
Elementary
education
may be
compulsory

25. ALTERNATIVE DELIVERY
METHODS OF PUBLIC GOODS
 Public goods can be provided via many arrangements. First,
govenment itself can provide all type of goods and services.
However, markets fail to provide pure public and common pool
goods. Markets are unable to supply a pure public good-say,
national defense or judiciary-due to their characteristics of
indivisibility and non-exclusion.
 Market also fails to supply common pool goods now that their
consumption is free as long as individuals can spend effort to
obtain them.
 The reason why this type of goods can not be provided by
marketplace is that exclusion mechanism can be hardly
implemented or sometimes it is too expensive to implement. As a
result of this, free rider usually occurs for this type of goods and
therefore market is not interested in production.

26. Key Terms with Alternative Delivery
Methods of Goods and Services
 Government production
 Private pruduction
 Joint venture
 Contracting-out
 Leasing
 Franchising
 Grant system
 Voucher system
 User charges
 Voluntary organizations
 Build-operate-own
 Build-operate-transfer

27.  Although a pure public good can only be provided by
public, a pure private good can be delivered via
numerous arrangements.
 First, government itself can produce this type of goods
by establishing public economic enterprises.
 Secondly, government can make a contract agreement
with a private firm to supply some private goods and
services.
 Third, government can transfer the management of a
specific public service to a private firm (management
contract) or transfer both management and operation
(leasing).

28. ALTERNATIVE DELIVERY METHODS OF PUBLIC GOODS
Pure Pure Toll Common Merit/ Demerit
Private Public Goods Pool Goods
Goods Goods Goods
1. Market (+) (-) (+-) (+-) (+-)
2. Government (-) (G) (+-) (+-) (+-)
3.Contracting Out (+-) (+-) (+-) (+-)
4.Franchising (+-) (+-) (+) (+-)
5.Leasing (+-) (+-) (+-) (+-)
6.Management Contract (J) (+-) (+-)
7.Joint venture (+)
8.User Charges (+)
9.Grant (+-) (+)
10.Voucher (+) (+)
11.Voluntary Organizations (+)
12.Build-Operate-Transfer System (+-) (+-)
Notes: (+) The most successful arrangement.
(+-) Market arrangement is considered more succesful than govemment. However, limited government regulation and control
may be required.
(-) The arrangement is not successful.
(G) Government is the only producer, although the government arrangement is not successful.ü
(J) Arrangement is successful, but government interference should be minimal and management and operation should be performed by
the private firm.
Delivery Methods of Public Goods