Tag Archives: public goods

The “Public Goods” Myth

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The argument for the provision of public goods by the state goes like this:

People will free ride on a public good like a clean atmosphere because they can benefit from it without contributing to it. Mimi will enjoy more breathable air when others switch to a Prius even if she doesn’t drive one herself. So the state is justified as a means of forcing people like Mimi to contribute: for instance, by creating laws that penalize pollution….

Standard models predict that public goods will be underprovided because of free riding. Public goods are non-excludable, meaning that you cannot be excluded from enjoying them even if you didn’t contribute to them. Public goods are also non-rivalrous, meaning that my enjoyment of the good doesn’t subtract from yours. Here’s an example. A storm threatens to flood the river, a flood that would destroy your town. If the townspeople join together to build a levee with sandbags, the town will be spared. However, your individual contribution won’t make or break the effort. The levee is a public good. If it prevents the flood, your house will be saved whether or not you helped stack the sandbags. And the levee will protect the entire town, so protecting your house doesn’t detract from the protection afforded to other houses.

It’s typically assumed that people won’t voluntarily contribute to public goods like the levee. Your individual contribution is inconsequential, and if the levee does somehow get provided, you enjoy its protection whether or not you helped. You get the benefit without paying the costs. So the self-interested choice is to watch Netflix on your couch while your neighbors hurt their backs lugging sandbags around. The problem is, your neighbors have the exact same incentive to stay home— if enough others contribute to the levee, they’ll enjoy the benefits whether or not they contributed themselves. Consequently, no one has an incentive to contribute to the levee. As a result of this free-rider problem, the town will flood even though the flood is bad for everyone. [Christopher Freiman, Unequivocal Justice, 2017]

The idea is that private entities won’t provide certain things because there will be too many free riders. And yet, people do buy Priuses and similar cars, and do volunteer in emergencies, and do commit myriad acts of kindness and generosity without compensation (other than psychic). These contrary and readily observable facts should be enough to discredit public-goods theory. But I shall continue with a critical look at key terms and assumptions.

What is a public good? It’s a good that’s “underprovided”. What does that mean? It means that someone who believes that a certain good should be provided in a certain quantity at a certain price is dissatisfied with the actual quantity and/or price at which the good is provided (or not provided).

Who is that someone? Whoever happens to believe that a certain good should be provided at a certain price. Or, more likely, that it should be provided “free” by government. There are many advocates of universal health care, for example, who are certain that health care is underprovided, and that it should be made available freely to anyone who “needs” it. They are either ignorant of the track record of socialized medicine in Canada and Britain, or are among the many (usually leftists) who prefer hope to experience.

What is a free rider, and why is it bad to be a free rider? A free rider is someone who benefits from the provision and use of goods for which he (the free rider) doesn’t pay. There are free riders all around us, all the time. Any product, service, or activity that yields positive externalities is a boon to many persons who don’t buy the product or service, or engage in the activity. (Follow the link in the preceding sentence for a discussion and examples of positive externalities.) But people do buy products and services that yield positive externalities, and companies do stay in business by provide such products and services.

In sum, “free rider” is a scare term invoked for the purpose of justifying government-provided public goods. Why government-provided? Because that way the goods will be “free” to many users of them, and “the rich” will be taxed to provide the goods, of course. (“Free” is an illusion. See this.)

Health care — which people long paid for out of their own pockets or which was supported by voluntary charity — is demonstrably not a public good. If anything, the more that government has come to dominate the provision of health care (including its provision through insurance), the more costly it has become. The rising cost has served to justify greater government involvement in health care, which has further driven up the cost, etc., etc., etc. That’s what happens when government provides a so-called public good.

What about defense? As I say here,

given the present arrangement of the tax burden, those who have the most to gain from defense and justice (classic examples of “public goods”) already support a lot of free riders and “cheap riders.” Given the value of defense and justice to the orderly operation of the economy, it is likely that affluent Americans and large corporations — if they weren’t already heavily taxed — would willingly form syndicates to provide defense and justice. Most of them, after all, are willing to buy private security services, despite the taxes they already pay….

… It may nevertheless be desirable to have a state monopoly on police and justice — but only on police and justice, and only because the alternatives are a private monopoly of force, on the one hand, or a clash of warlords, on the other hand.

The environment? See this and this. Global warming? See this, and follow the links therein.

All in all, the price of “free” government goods is extremely high; government taketh away far more than it giveth. With a minimal government restricted to the defense of citizens against force and fraud there would be far fewer people in need of “public goods” and far, far more private charity available to those few who need it.

Related posts:
A Short Course in Economics
Addendum to a Short Course in Economics
Monopoly: Private Is Better than Public
Voluntary Taxation
What Free-Rider Problem?
Regulation as Wishful Thinking
Merit Goods, Positive Rights, and Cosmic Justice
More about Merit Goods
Don’t Just Stand There, “Do Something”

More about Merit Goods

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This is a follow-up to “Merit Goods, Positive Rights, and Cosmic Justice.” That post was inspired by a post at Austin Frakt’s blog, The Incidental Economist, about which John Goodman had this to say:

Austin, on first reading, I thought you were saying that I (as a taxpayer) should help pay for your daughter’s asthma medication — even though you agree that you can afford to pay for it yourself. Disbelief overcame me, so I read your post a second time. Then I read it a third. Each time, the message was as incomprehensible as on the previous reading.

Is there a persuasive reason why I owe the Frakt household something? If so, it’s not in this post.

Frakt’s response to Goodman:

You owe me nothing. Follow the link to value-based insurance design or find the V-BID center at U Mich. I think you’re looking for trouble where none should exist.

Well, I followed the link, and came away unconvinced that Frakt wants nothing from Goodman or anyone else. Accordingly, I posted this comment (paragraph breaks and emphasis added):

Your post about value-based insurance — to which you refer John Goodman — suggests that by reducing the co-pay on asthma drugs, trips to the ER would be averted, thus reducing the insurance company’s total costs and (possibly) the premiums it must charge its policy holders. If I have that right, it explains your reply to Goodman that “You owe me nothing.” I suspect that what he reacted to — and I would have reacted to similarly — is your assertion that “breathing [is] a merit good, something we all have a right to enjoy.” That assertion is unnecessary to the discussion of value-based insurance. And your use of the term “merit good” strongly suggests that your statement “Asthma medication is exactly the type of health product that should be free, or nearly so, especially for low-income families” is not just a statement about the presumed efficacy of value-based insurance, but advocacy for income redistribution.

In that case, a modified version of Goodman’s reaction is entirely in order, and I subscribe to it: “Is there a persuasive reason why I owe other households something, and what qualifies you (or anyone else) to make that judgment?” The excuse that I might otherwise end up paying for ER services through my taxes or insurance premiums relies on the assumption that ER services are a merit good that ought to be covered by tax subsidies and/or mandated insurance coverage. There is no end to the number of things that can be called merit goods, but calling them merit goods does not disguise the fact that doing so is an excuse for imposing one person’s or group’s preferences and burdens on others.

Those impositions have led to the present state of affairs, in which myriad interest groups pick each others’ pockets — and the pockets of the unfortunate who are not well-represented by an interest group. One truly unfortunate result of that state of affairs — aside from the gross diminution of liberty — is the diversion of resources from uses that would foster greater economic growth and alleviate much of the poverty that provides an excuse, in the first place, for special pleading about merit goods.

Merit Goods, Positive Rights, and Cosmic Justice

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A merit good is said to be something that

an individual or society should have on the basis of some concept of need, rather than ability and willingness to pay…. [T]he concept … lies behind many economic actions by governments…. Examples include the provision of food stamps to support nutrition, the delivery of health services to improve quality of life and reduce morbidity, subsidized housing and arguably education….

Sometimes, merit … goods are simply seen as an extension of the idea of externalities. A merit good may be described as a good that has positive externalities associated with it. Thus, an inoculation against a contagious disease may be seen as a merit good. This is because others who may not now catch the disease from the inoculated person also benefit.

[M]erit … goods can be defined in a different way…. The essence of merit … goods is [has] do with … information failure…. This arises because consumer[s] do not perceive quite how good or bad the good is for them: either they do not have the right information or lack relevant information…. [A]merit good is [a] good that is better for a person than the person … realizes.

Other possible rationales for treating some commodities as merit … goods include public-goods aspects of a commodity…

A merit good, in short, is something that someone believes that the state should cause to be given to certain individuals, as a “positive right,” for various reasons: perceived need, externalities, and market failure among them.

But the “right” to something that is not earned or freely given is not a right, as the term is properly understood. It is an extortion by force or the threat of force, either directly (as in the case of outright theft) or though the coercive power of the state. Only a fool or a dishonest person can say that something obtained through extortion is obtained by right, unless that person believes that the victims of extortion are less deserving — less human — than the intended beneficiaries of extortion.

If a right is anything, it is something that all members of a polity can enjoy equally. If some members of a polity are placed above others through force or the threat of force, then the polity has no system of rights; it has a system of arbitrary privileges, dispensed by the state according to the whims of the faction then in power.

Given that a right must be something that all can enjoy equally, a right can only be negative:

  • the right not to have one’s life taken if one is peaceful toward others
  • the right not to be deprived of liberty if one is peaceful toward others
  • the right to the peaceful enjoyment and use of one’s property in the pursuit of one’s life and livelihood.

These negative rights come down to this: the right to be left alone as one leaves others alone.

If “obligations” accompany the right to be left alone, they do so only in the context of voluntary social (and economic) relationships, wherein acts of kindness and charity flow readily among persons who trust and care for each other and do so, in good part, because they observe the right of others to be left alone. These “obligations” are incurred and honored voluntarily, not because a person or group invested with the power of the state decrees them.

Merit goods (“positive rights”), by contrast, are the products of presumption — judgments about who is “needy” and “deserving” — and they are bestowed on some by coercing others. These coercions extend not only to the seizure of income and wealth but also to denials of employment (e.g., affirmative action), free speech (e.g., campaign-finance “reform”), freedom of contract (e.g., mandatory recognition of unions), freedom of association (e.g., forced admission of certain groups to private organizations), freedom of conscience (e.g., forced participation in abortions), and on and on.

The list of “merit goods” that forms the basis for the many and various forms of state-sponsored coercion may not be infinite, but it is exceedingly long. And its length is limited only by the perverse ingenuity of the seekers of “cosmic justice.” What is cosmic justice? I like this example from Thomas Sowell’s speech, “The Quest for Cosmic Justice“:

A fight in which both boxers observe the Marquis of Queensberry rules would be a fair fight, according to traditional standards of fairness, irrespective of whether the contestants were of equal skill, strength, experience or other factors likely to affect the outcome– and irrespective of whether that outcome was a hard-fought draw or a completely one-sided beating.

This would not, however, be a fair fight within the framework of those seeking “social justice,” if the competing fighters came into the ring with very different prospects of success — especially if these differences were due to factors beyond their control….

In a sense, proponents of “social justice” are unduly modest. What they are seeking to correct are not merely the deficiencies of society, but of the cosmos. What they call social justice encompasses far more than any given society is causally responsible for. Crusaders for social justice seek to correct not merely the sins of man but the oversights of God or the accidents of history. What they are really seeking is a universe tailor-made to their vision of equality. They are seeking cosmic justice.

To be a practitioner of cosmic justice, a person must set himself up as a judge of the merit of other persons, without really possessing more than superficial information about those other persons (e.g., that they are “rich” or “poor” by some standard). As I once said of two founders of modern “liberalism,” T.H. Green and L.T. Hobhouse, they are

accountants of the soul….

…(presumably) intelligent persons who believe that their intelligence enables them to peer into the souls of others, and to raise them up [or put them down] through the blunt instrument that is the state.

This is done on in the service of concepts that do not bear close examination, such as externalities, public goods, market failure, and social justice, social welfare, and positive rights. I will not repeat my asseessments of those concepts, but refer you to some of them instead:

Greed, Cosmic Justice, and Social Welfare
Positive Rights and Cosmic Justice
A Short Course in Economics
Social Justice
The Meaning of Liberty
Positive Liberty vs. Liberty
More Social Justice
On Self-Ownership and Desert
Luck-Egalitarianism and Moral Luck
Externalities and Statism

What Free-Rider Problem?

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Steven Horwitz of The Coordination Problem writes:

This is an absolutely fascinating article by Laura Vanderkam at City Journal … that explores the role of private donations and private management in caring for Central Park and other green spaces in New York City.  Central Park remains public property, but the Central Park Conservancy that manages it relies overwhelmingly on private donations for its revenues.

But perhaps the most amazing thing about Central Park is how little tax money goes into maintaining it. Though it is still ultimately the city’s responsibility, the park has been managed since the 1980s by the nonprofit Central Park Conservancy, and it relies on private donations for most of its budget.

These are, to use a phrase from the article, “privately funded public spaces.”  It’s also worth noting, as the article does, that the condition of the parks has improved tremendously since the private organizations took over managing them.

This is consistent with my objection to the idea that there are “public goods”:

Public goods are thought to exist because certain services benefit “free riders” (persons who enjoy a service without paying for it). It is argued that, because of free riders, services like national defense be provided by government because it would be unprofitable for private firms to offer such services.

But that analysis overlooks the possibility that those who stand to gain the most from the production of a service such as defense may, in fact, value that service so highly that they would be willing to pay a price high enough to bring forth private suppliers, free riders notwithstanding. The free-rider problem isn’t really a problem unless the producer of a “public good” responds to requests for additional services from persons who don’t pay for those services. But private providers would not be obliged to respond to such requests.

Moreover, given the present arrangement of the tax burden, those who have the most to gain from defense and justice (classic examples of “public goods”) already support a lot of free riders and “cheap riders.” Given the value of defense and justice to the orderly operation of the economy, it is likely that affluent Americans and large corporations — if they weren’t already heavily taxed — would willingly form syndicates to provide defense and justice. Most of them, after all, are willing to buy private security services, despite the taxes they already pay.

I conclude that there is no “public good” case for the government provision of services.

With respect to defense, however, I continue with this:

It may nevertheless be desirable to have a state monopoly on police and justice — but only on police and justice, and only because the alternatives are a private monopoly of force, on the one hand, or a clash of warlords, on the other hand. (See this post, for instance, which also links to related posts.)

But I conclude with this:

You may ask: What about environmental protection? Isn’t it a public good that must be provided by government? No. Read this and this. Which leads me to “market failure.”

“Market failure” is another excuse for unnecessary and costly government intervention into private affairs. Go here and scroll to item 16 for more on that subject.

Voluntary Taxation

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Will Wilkinson, writing at The Economist, quotes Ayn Rand and begs to differ with her:

Ayn Rand’s position on government finance is unusual, to say the least. Rand was not an anarchist and believed in the possibility of a legitimate state, but did not believe in taxation. This left her in the odd and almost certainly untenable position of advocating a minimal state financed voluntarily. In her essay “Government Financing in a Free Society”, Rand wrote:

In a fully free society, taxation—or, to be exact, payment for governmental services—would be voluntary. Since the proper services of a government—the police, the armed forces, the law courts—are demonstrably needed by individual citizens and affect their interests directly, the citizens would (and should) be willing to pay for such services, as they pay for insurance.

This is faintly ridiculous. From one side, the libertarian anarchist will agree that people are willing to pay for these services, but that a government monopoly in their provision will lead only to inefficiency and abuse. From the other side, the liberal statist will defend the government provision of the public goods Rand mentions, but will quite rightly argue that Rand seems not to grasp perhaps the main reason government coercion is needed, especially if one believes, as Rand does, that individuals ought to act in their rational self-interest.

It’s true that we each benefit from the availability of genuinely public goods, but we benefit most if we are able to enjoy them without paying for them. A rationally self-interested individual will not voluntarily pay for public goods if she believes others will pay and she can get a free ride. But if we’re all rationally self-interested, and we know we’re all rationally self-interested, we know everyone else will also try to get a free ride, in which case it is doubly irrational to voluntarily pitch in. (from “Ayn Rand on Tax Day,” free registration required)

Wilkinson’s analysis is more than faintly wrong. A rationally self-interested individual will voluntarily pay for something if his expected benefit is worth (to him) the price he pays. The fact that a purchase might yield uncompensated benefits to third parties (i.e., positive externalities) is beside the point. Individuals do many things with their money that benefit others, without expecting to be repaid by those others. Individuals also do things that benefit others, in more than the ordinary way of voluntary exchange — sometimes for money, sometimes not, and sometimes at the risk of life and limb.

In addition to the obvious but signifcant case of philanthropy, there are subtle things like building an elegant house with beautifully landscaped grounds. Clusters of such houses on upscale streets yield satisfaction not only to their owners but also to drivers, joggers, and strollers who pass through the neighborhood — often with the main purpose of enjoying the elegance and beauty that surrounds them.

A similar case in point is the practice observed in many neighborhoods of creating elaborate displays of Christmas lights. Such displays not only please the homeowners who create them (or pay someone to create them) but also the flocks of sightseers who are drawn to such displays. Homeowners (for the most part) do this without compensation from sightseers. (Some homeowners in a less-affluent neighborhood in Austin, which is known for its over-the-top lighting concoctions, have been known to invite voluntary donations to help defray the cost of their displays.)

Finally, on this point, there are not-so-subtle examples of doing good for others as a habit and even a way of life. Many persons devote many hours a week to voluntary work in schools, hospitals, and the like. Then there are firefighters, police officers, and a goodly fraction of the members of the armed forces who perform jobs that put them in harm’s way, and do so not only for the money they earn but often because they feel a duty to make their towns, cities, and nation safer for the inhabitants thereof.

In any event, a rationally self-interested person who values national defense or the justice system would be a good candidate for making voluntary contributions to support those kinds of governmental functions. It would be a simple thing for influential and very wealthy individuals and major corporations to parlay their self-interest into the creation of organizations that raise money from like-minded individuals and corporations. Imagine a version of the American Heart Association called the American Defense Association; imagine a version of the Junior League called the Justice League. If anything, it should be easier to entice “voluntary taxes” in support of essential functions like defense and justice than it is to entice contributions to charitable organizations, which seldom yield more than “feel good” benefits to donors.

Not all fund-raising efforts for charities succeed in obtaining donations from everyone they solicit, but fund-raisers neither expect nor require 100-percent success. Similarly, an American Defense Association or Justice League would not require 100-percent success in its efforts to raise enough money to defray the costs of national defense and domestic justice. It is enough that the prospect of being “taxed voluntarily” to support such causes would appeal to a large number of affluent taxpayers.

Of particular interest to fund-raisers would be those individuals and couples with adjusted gross incomes in the top 50 percent of the AGI distribution. For tax year 2008, the top 50 percent paid 97 percent of federal income taxes collected by the federal government. Before the Great Recession and associated “stimulus” spending, when the federal budget was nearly in balance, spending on national defense and justice (at all levels of government) accounted for about 20 percent of all government spending. It seems to me that the a rationally self-interested person or couple in the top 50 percent would leap at the chance to eliminate all of his or their taxes if the alternative were to donate a smaller amount to the causes of defense and justice. There would be holdouts — especially among affluent leftists, of course — but there would also be the usual donors who give far more than their “fair share.”

Consider, for example, the persons in the top 1 percent of the AGI distribution, who paid 38 percent of the federal income taxes collected for 2008, or the persons in the top 10 percent, who paid 70 percent of the taxes. Members of those groups (as well as others in the top 50 percent) would have a strong incentive to ensure the provision of defense and justice, understanding (as most of them do) the importance of order and stability to their livelihoods.

Further, I expect that many of top income-earners would lead example (as they do for charities) with their contributions. Additionally, I would expect them to be leading contributors to advertising campaigns that explain the economic benefits of maintaining a robust defense and vigilant system of justice while, at the same time, paying a lot less for government services. Chief among the benefits would be stronger economic growth — as money is saved and invested instead of being poured down so many rat-holes and into counterproductive regulatory agencies. In the end, there would be more jobs, higher incomes, less need for charity, and more money with which to dispense charity to truly needy individuals.

In summary, Wilkinson’s analysis seems rooted in a sterile conception of rational self-interest. It seems to assume that bright, hard-working, high-earning individuals cannot perceive the real benefits that would flow from “voluntary taxation” for certain purposes, namely, national defense and domestic justice.