consuming the good, and the firms providing a public good not get a signal from consumers that reflects their benefit of consuming the good Certainly we can expect some benefits of a public good to be revealed in the market If the government did not provide national defense, for example, we would expect some defense to be produced, and some people would contribute to its production But because free-riding behavior will be common, the market’s production of public goods will fall short of the efficient level The theory of public goods is an important argument for government involvement in the economy Government agencies may either produce public goods themselves, as local police departments, or pay private firms to produce them, as is the case with many government-sponsored research efforts An important debate in the provision of public education revolves around the question of whether education should be produced by the government, as is the case with traditional public schools, or purchased by the government, as is done in charter schools External Costs and Benefits External costs are imposed when an action by one person or firm harms another, outside of any market exchange The social cost of producing a good or service equals the private cost plus the external cost of producing it In the case of external costs, private costs are less than social costs Similarly, external benefits are created when an action by one person or firm benefits another, outside of any market exchange The social benefit of an activity equals the private benefit revealed in the market plus external Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 790