Decision making
David Hume (1711–76)
c.500 BCE In Athens indirect taxes are used to finance city festivals, temples, and walls. Occasional direct taxes are levied at times of war.
1421 The first patent is granted to Italian engineer Filippo Brunelleschi to protect his invention of hoisting gear for barges.
1848 The Communist Manifesto advocates collective ownership of the means of production by the workers.
19th century Public street lighting is introduced in Europe and America.
1954 US economist Paul Samuelson develops a modern theory of public goods.
Even within a well-functioning market economy, there are areas in which markets fail. One important example of market failure is in the provision of public goods—goods that are to become freely available to all, or where it would be difficult to prevent their use by non-payers. These goods, which include things such as national defense, are difficult for a private firm or individual to supply profitably. This problem, known as “free-riding” (where consumers enjoy the goods without paying for them) means that there is no profit incentive. However, there is a demand for these goods, and because private markets may not be able to satisfy this demand, public goods are usually provided by governments and funded through taxation.
A failure of the market to provide these goods was recognized by the philosopher David Hume in the 18th century. Influenced by Hume, Adam Smith, an ardent advocate of the free market, conceded that a government’s role was to provide those public goods that it would not be profitable for individuals or firms to produce.
"Where the riches are engrossed by a few, these must contribute very largely to the supplying of the public necessities."
David Hume
There are two distinguishing characteristics of public goods that cause them to be undersupplied by the markets: non-excludability, meaning that it is difficult to prevent people who don’t pay for the goods from using them; and non-rivalry, meaning that one person’s consumption of the good does not diminish the ability of others to consume it. A classic example is street lighting; it would be almost impossible to exclude non-payers from enjoying its benefits, and no individual’s use of it detracts from that benefit to other users.
As industrial economies developed in the 19th century, countries had to overcome the problem of free-riding in areas such as intellectual property. Intangible goods, such as new knowledge and discoveries, have the attributes of non-excludability and non-rivalry, and so are at risk of being undersupplied by the market. This could discourage the development of new technologies unless they can be protected in some way. To do this, countries developed laws granting patents, copyright, and trademarks to protect the returns from new knowledge and inventions. Most economists acknowledge that government has a responsibility to provide public goods, but debate continues about the extent of that responsibility.
Lighthouses are a public good from which it is hard to exclude non-payers, and which many people can use at the same time. They are invariably provided collectively.
The epitome of the “Scottish Enlightenment,” David Hume was one of the most influential British philosophers of the 18th century. He was born in Edinburgh in 1711, and from an early age showed signs of a brilliant mind: he entered Edinburgh University at the age of 12, studying first law and then philosophy.
In 1734, Hume moved to France, where he set out his major philosophical ideas in A Treatise of Human Nature. He then devoted much of his time to writing essays on literary and political subjects and struck up a friendship with the young Adam Smith, who had been inspired by his writings. In 1763, Hume was given a diplomatic role in Paris, where he befriended the revolutionary French philosopher Jean-Jacques Rousseau. He settled in Edinburgh again in 1768, where he lived until his death in 1776, aged 65 years.
1739 A Treatise of Human Nature
1748 An Enquiry Concerning Human Understanding
1752 Political Discourses
See also: Free market economics • External costs • Markets and social outcomes