According to economists, public goods are goods that can be consumed by many without detracting from the benefits enjoyed by others. Public goods are nonrivalrous and nonexcludable. That is, their use by some consumers does not affect their availability to other consumers and no one can be excluded from using them. The classic example of a pure public good is the lighthouse, whose benefits are available to anyone and everyone. Public goods can also be produced by the private sector (which is counterintuitive to most people), with the classic example being the newspaper. While produced by the private sector, the information in a newspaper is nonrivalrous and nonexcludable. No newspaper publisher can keep me from passing on to others the information I read this morning. However, the private sector does not in general produce enough of these goods for which there is no market or sufficient revenue, and very often these are the goods with social benefits. It is this situation that underlies the justification for the public sector supply of public goods.
Some public goods can be made rivalrous and excludable, with education being a classic example. While information is almost always nonrivalrous, it may be made excludable by pricing, copyright, or failure to provide access electronically or in print.
Pricing of nonrivalrous public goods, such as information, is never economically efficient because some people will be prevented from enjoying the benefit of the good even though their consumption of the good would have little or no marginal cost to the producer. Pricing implies that information is a commodity, but information’s characteristics make such a categorization problematic—information’s content is easily shared, resistant to appropriation, and difficult to measure. Attempting to value information is challenging, because once information is disseminated, it can be spread around and have immense and often unanticipated downstream effects. For all of these reasons, information is difficult to cost and to price.
Moreover, wider dissemination of information does not increase the costs to the producer. This situation makes possible the monopolistic provision of information goods by those who can take full advantage of the economies of scale. (cf., Carl Shapiro and Hal Varian). Economists recognize that private sector monopolists underproduce and overprice their goods and that public sector information producers are usually monopolists. Economists also argue that pricing above the marginal cost of dissemination is inefficient because it results in a deadweight loss and eliminates the consumer surplus. Consumer surplus can be thought of as money left over because a good cost less than expected: If a person has set aside $50 to buy a shirt, and the shirt is actually bought on sale for $25, the consumer surplus is $25. Consumer surplus is economically efficient because consumers will generally take that $25 and do something else with it that is good for the economy. They may buy another item or invest the money. This consumer surplus is lost when prices are set above marginal cost. Furthermore, such pricing means that some items will be produced and not sold, which is economically inefficient, or else units that have benefits greater than their cost will not be purchased. Economists agree that there is no net social benefit to charging above marginal cost.
When the public sector does impose user fees for information, it claims that they are based on marginal cost or on cost recovery pricing. The question is, What is being included in the marginal cost? Some of the literature indicates there is a long-term marginal cost and a short-term marginal cost, but what is the difference? It appears that