It seems quite simple under framework of free market, when there are no taxes or subsidies,price celling or price floors, etc, that can mess up the market: if there is profit (or will be, according to forecast of expert), then wealth was created (or will be created). If profit is negative (i.e. we have loses) then wealth was destroyed.

But what if we have public goods provided by the State? There will be no profit, so this metric is dead in this case. Normally people don't buy things from the State, they are taxed.

Using opinion of an expert seems too fragile strategy to see if wealth is created or destroyed. Probably we could survey people with questions like "How much would you contribute to additional street lighting if there was crowdfunding campaign?", but I'm not sure if it's how it is done in practice.(Please confirm if I right). Ideally it would give us demand curve.


1 Answer 1


You are right, given that it is not possible for markets to provide public goods this is often done by the state and surveys are one way of establishing the amount desired. Such surveys could establish individual demand curves. Note that, due to the non-rivalry of public goods constructing a demand curve for society as a whole requires vertical addition of the individual demand curves. This is known as the Samuelson rule.

There are however all kinds of problems associated with such surveys. Given that tax levels depend upon your answer you may want to understate your true willingness to pay. Survey respondents may also find themselves in a public goods game where it is individually rational to understate WTP even though as a group they would want the public good.

Of course we are not surveyed all the time in practice, but we approve or disapprove of further increases or decreases in public goods provision by voting for certain parties (of course that is not the only consideration when voting but it may be part).

Depending on the public good in question sometimes other tools are available. For example a large recreational spot or natural area that is freely available for recreation is also a public good, provided it doesn't become congested. The demand curve can then be constructed by estimating the travel costs that people incur to travel and recreate in that spot. That is called the travel cost method.

Also, sometimes we can construct demand curves for public goods by observing the premium people are willing to pay in terms of house prices for a nice view in their house, or the reduction because they live in a highly polluted area (pollution is often an example of a public bad). Those are hedonic methods.

  • $\begingroup$ " and surveys are one way of establishing the amount desired" What are other ways? "but we approve or disapprove of further increases or decreases in public goods provision by voting for certain parties" What if we live under dictatorship? $\endgroup$ Nov 22, 2018 at 13:34
  • $\begingroup$ @user161005 I extended my answer naming a few other methods. If one lives under a dictatorship the dictator will decide the level of public good provided by the state. Should the dictator be benevolent the dictator can use the above methods to try and establish how much is needed $\endgroup$ Nov 22, 2018 at 13:49

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.