In the growing body of literature on the economics of the environment, the concepts of public goods and externalities are important. There are at least two basic characteristics that distinguish pure public goods from private goods. Firstly, the same unit of a public good can be consumed by many. Secondly, once a public good is provided for some individuals, it is impossible or at least very costly to exclude others from benefiting from it. A private good, on the other hand, once consumed by one individual cannot be consumed by others. Moreover, the buyer of the good is free to exclude other individuals from consuming it.

Discussions of externalities are often concerned with the case where one party affects the consumption or production possibilities of another. However, most important external effects affect a large number of individuals. For example, a dam may flood and destroy a valuable wilderness area now used for hiking, fishing, hunting, and bird watching, and hence affect many (groups of) individuals. Another example is pollution of the air and water. These examples also show that there is a close correspondence between public goods (‘bads’) and externalities. In fact, it is reasonable to view a public good or ‘bad’ as a special kind of externality in consumption.

The first part of this chapter, Sections 1–4, derives consumer surplus measures for public goods. The reinterpretation of these measures in terms of ‘traditional’ external effects is a straightforward matter.