excluded for nonpayment. Such public 

 goods include defense, schools, and var- 

 ious governmental services in which we 

 feel strongly that, even though there 

 may be a limited private market, the 

 common good would be better served by 

 vigorous governmental participation. Of 

 course, defense is the largest public 

 good that we provide ourselves, and you 

 can immediately see the exclusion prob- 

 lem in these things. If one provides 

 national defense, one can not exclude a 

 citizen beneficiary. 



On a smaller scale, we have the 

 same situation with respect to a flood- 

 plain. That is why we have so much gov- 

 ernmental activity in flood control and 

 flood damage reduction. The assumption 

 is that flood control is a public good 

 because, within the floodplain itself, 

 one cannot easily exclude anyone who is 

 unwilling to pay for that protection. Of 

 course, there are various police or leg- 

 islative methods through which one could 

 require payment, but one cannot get a 

 voluntary payment. 



Much of the nation's natural re- 

 sources fall into this category of pub- 

 lic goods, or at lease in the transition 

 from a free good to a public good. In 

 the water resources area, we have been 

 able to see the transition of water as a 

 commodity from a free good (where there 

 was little or no price attached to it), 

 to a public good, and thence to an eco- 

 nomic good in which the price is quite 

 high. It is the public goods sector 

 where we have our real problem with 

 pricing. How do we price the public 

 goods? How do we charge the beneficia- 

 ries of public goods? 



Related also to the public goods 

 sector is a concept which I often find 

 advantageous to explain, that is, the 

 concept of externalities. An externality 

 exists when one cannot exclude a bene- 

 ficiary from receiving a benefit, nor 

 can one wery easily force him to pay for 

 a benefit received. Normally, we have 

 thought of externalities in terms of 

 negatives or negative goods. For exam- 

 ple, pollution is an externality because 

 we have traditionally discharged our ef- 

 fluents and our pollutants for zero pri- 

 vate cost. Any cost incurred was either 

 borne by third parties, such as down- 

 stream people or downwind people or by 

 the public sector in terms of wildlife 



damage or habitat damage. An externality 

 exists when the market system cannot 

 voluntarily and effectively register or 

 sum the total merits of the good. We 

 sometimes make people pay by passing a 

 law or by enforcing a standard such that 

 we internalize these costs. The only 

 other recourse is through the courts. 

 Recently, we have had a lot of settle- 

 ments of externalities through the 

 courts in both the private and public 

 sectors, especially, since the National 

 Environment Policy Act (NEPA) of 1969. 



The last thing I would like to men- 

 tion is with respect to the goals and 

 objectives of economics. The first is 

 that of achieving efficiency. Efficiency 

 is the objective with which we are most 

 frequently concerned. The companion con- 

 cept to efficiency, and one we do not 

 hear too much about, is equity. The con- 

 cept of equity does not necessarily mean 

 equality. Equity in economics more ac- 

 curately means fair treatment rather 

 than equal treatment. Equity refers to 

 the distribution or changes in the dis- 

 tribution, which exist or may be brought 

 about by economic or political activi- 

 ties. In any public policy decision or 

 in any economic decision, we always have 

 the two impacts: the efficiency impact 

 and the equity impact. The central ques- 

 tion of efficiency is how much does it 

 cost or how much does one pay for it? 

 The central quesion of equity is who 

 pays? 



Some policy decisions increase ef- 

 ficiency; some certainly decrease effi- 

 ciency. Most policy decisions change the 

 distribution of benefits and costs so 

 that some groups of people are enriched, 

 or at least made better off, while others 

 are damaged or made worse off. For ex- 

 ample, if the Environmental Protection 

 Agency should impose an effluent dis- 

 charge standard on kraft mills but not 

 on newsprint mills, then' this would dam- 

 age users of kraft relative to users of 

 newsprint. It would increase kraft costs 

 and affect both producers and consumers 

 of their products. This is a situation 

 in which a policy decision has an ad- 

 verse equity impact. However, the total 

 efficiency for the economy may be either 

 good or bad, depending on the tradeoffs 

 between the predecision social costs and 

 postdecision private costs. Efficiency 

 is the size of the pie, and equity is 



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