Introduction to Public Goods and Common Goods

Published by Mario Oettler on

Public goods are goods that are non-exclusive and non-rivalrous. Users cannot be barred from using it, even if they do not pay for them. An example of a public good is street lighting.

Common goods are those goods that are non-exclusively but rivalrous. An example of common goods are wild fish stocks or meadows.

Commonly, common goods face two issues:

  • Overuse: Too many users use this common good and therefore depleting it.
  • Free-Rider: Too little effort is made by individual users to create a common good.

Example for Free-Rider

Let’s consider a simple example. There are two players, A and B, with a budget of 5 EUR each. Each player can decide to invest an arbitrary amount in a fund. The rule says that the total amount of the fund is multiplied by 1.5, and the result is divided evenly among the two players, no matter how much they have invested.

If all two players invest 5 EUR each (=10 EUR in total) the fund contains 15 EUR after multiplying it by 1.5. When distributed among the players, every player receives 7.5 EUR back (15/2=7.5). The profit every player made is 2.5 EUR.

Would it be possible for one player to get more than 2.5 EUR if they could not spend more than their budget of 5 EUR each? Let’s assume that Player A invests 5 EUR. But player B invests only 0 EUR. The total amount in the fund is 5 EUR. After multiplying it with 1.5, the amount is 7.5 EUR. Each player receives 7.5/2 = 3.75 EUR. Player A has a loss of 3.75-5=-1.25 EUR. But player B made a profit of 3.75-0=3.75 EUR, which is higher than the 2.5 EUR in the first round.

The highest profit for a single player would occur if he doesn’t contribute at all and the other player contributes 5 EUR.

The pay-off matrix shows the situation.

The Nash-Equilibrium is in {0 EUR; 0 EUR}. But this is neither individually nor collectively the best outcome.

Blockchain Context

Storage is a common good in the blockchain space. Although users pay transaction fees, they are said to not fully compensate the storage requirements of the network. The reason is that the storage is occupied forever, but the fee is paid only once and only to one entity (the miner). Other nodes provide the storage for free. In a public blockchain, nobody can be excluded from using the storage as long as he pays for the transaction.