Public Goods and the Standard of Living


Public goods are products that individuals can consume without reducing its availability to other individuals and from which no one is excluded. Here is when the term “free rider” comes. “Free rider” is when some individuals in a population consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource.

For example, everyone gets to enjoy a street or a highway even if others evade paying taxes. (This is half true in Mexico, for the best highways built with our taxes are only used by those who pay extra to use them, and the worst ones that take longer to get to your destiny are “free” [since they are also built with our taxes]).

This is a problem with the public goods, the “free rider” problem, since the “free rider” objection is useless, because it applies to everything.

Then we go to the standard of living. Imagine that all of a sudden everything everyone has is gone, and we’re back to year 1 on day 1. What would happen to the standard of living? We would only be able to produce a tiny part of what we once did, and others we wouldn’t be able to produce at all anymore. Since there would be so few goods, prices would be very expensive. How could this economy improve? Well, if there were more goods, everyone could have more. So then comes the question, how could we produce more goods? If there were more capital goods, each person’s labor could produce more goods. Where do capital goods come from? From saving and investment, this is how the market economy improves the standard of living. These investments increase the amount of production the economy is capable of. This lowers the prices, and lets laborers produce other things the society could not have had before.

In conclusion, everyone enjoys public goods even if some people think it’s not fair, and the standard of living is improved through saving and investment.

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