Public goods

Public goods are goods reported to have two distinct aspects: "nonexcludability" means that it is hard to exclude people of consumption of a good (the "free rider problem"); everyone will try to "free ride" by allowing others to pay for it and as a result the good will be unproduced, even if there is a strong demand for it. The second characteristic (considered by some less important) is "nonrivalrous consumption", when the good can be consumed without diminishing anyone else's enjoyment of it or increasing its cost. Because these goods will not be produced in a sufficient amount, or at all, they should be produced by the government (or so it is commonly thought).

There are numerous examples of public goods of varying acceptance, possibly the most widespread is national defense. "To the extent one person in a geographic area is defended from foreign attack or invasion, other people in that same area are likely defended also. This makes it hard to charge people for defense, which means that defense faces the classic free-rider problem. Indeed, almost all economists are convinced that the only way to provide a sufficient level of defense is to have government do it and fund defense with taxes."

Arguments against

There are several arguments against the public goods theory:

• there is no way of knowing what is the "optimal" amount of the good produced
• because of the imprecise definition, many other goods can be to some degree considered public
• the presence of the state changes the incentive structure. Companies may declare their product for a public good to receive taxpayer funding.
• many of the 'public goods' are successfully produced in the private sector
• the theory does not at all prove that the government should produce these goods
• many of the goods government actually does produce do not correspond to the economist's definition of public goods, so the theory poorly explains the government's actual role in the economy
• there is no reason to expect the government to succeed where the market has supposedly failed. Once the political process, dominated by special interests and the self-interest of politicians and bureaucrats, is analyzed, the economic efficiency justification for government provision of "public goods" falls apart. Even on its own terms, the policy conclusion of public goods theory simply substitutes government failure for "market failure."
• public goods theory starts with faulty assumptions about the real world: that people live atomistically rather than in geographically defined communities and that public goods must be provided in isolation from private goods. More realistically, people live in communities where societal pressures can be brought to bear on would-be free riders and that the provision of public goods can be "tied" to the provision of private and excludable goods.

Private roads and bridges

Main article: Private roads

There is an extensive record of privately built roads - turnpikes - and bridges throughout the 19th century. Private initiative was the only effective means of providing new highways, because state and county finances were almost nonexistent and town resources were meager.

In view of the apparent free rider problem, the success was striking. The movement built new roads at rates previously unknown in America. Over $11 million was invested in turnpikes in New York, some $6.5 million in New England, and over $4.5 million (excluding state investment) in Pennsylvania. (A turnpike typically had a construction cost of $700 to $3,000 per mile and a length of 15 to 40 miles.) Based on the population of 1830, per-capita turnpike investment was approximately $3.90 in Massachusetts. Between 1794 and 1840, 238 private New England turnpikes built and operated about 3,750 miles of road. New York led all other states in turnpike mileage with over 4,000 as of 1821. Pennsylvania was second, reaching a peak of about 2,400 miles in 1832. New Jersey companies operated 550 miles by 1821; Maryland’s operated 300 miles of private road in 1830. Turnpikes also represented a great improvement in road quality .

Daniel Klein points out that community isolation, citizen familiarity, and weak, decentralized government bred close social ties and a strong participatory ethic. Towns of the early nineteenth century were independent and strong, and in the first three decades of the republic, the township held almost all of the administrative power of government. Alexis de Tocqueville, in his opus Democracy in America, says the towns "are independent in all that concerns themselves alone; and among the inhabitants of New England I believe that not a man is to be found who would acknowledge that the state has any right to interfere in their town affairs." The participatory nature of town government in early America has been well noted. This feature often makes it pointless to draw lines separating private and public works. At the same time, religious congregations often showed a penchant for making themselves busy in various improvement endeavors, such as schools, libraries, and poor relief. By generating the requisite social relations, or "social capital", as well as human capital, the religious and benevolent activities not only incited but empowered the application of voluntary efforts to community goals. The citizens’ cooperation with government efforts is noteworthy, but more significant is the willingness to forge public improvements by voluntary association.

Things have changed a lot since 1810. Neighbors are often strangers, so how can we expected social pressure and the like to curtail free riding? Klein has two remarks: one, whether it be a street association or the American Cancer Society, suasion tactics often yield results, as reported regularly in Nonprofit and Voluntary Sector Ouarterly. Second, if voluntary forces are deemed ineffective in providing public goods, that in itself is a policy issue. The ability of voluntary association to provide infrastructure, education, security, and poor relief depends on the exercise and spontaneous development of certain institutions, activities, and sentiments. Since governmental bodies dominate these services it is no surprise that the faculties of sodality remain degenerate. When a problem arises government is expected to deal with it. Participation does not become a personal responsibility and organizing leadership does not become a source of social esteem. Thus there is a lesson in the broader circumstances of early America which bred effective voluntary forces, as well as in the specific ways those forces established turnpikes.

Many other enterprises were undertaken to make improvements, and it is debatable whether they can be counted as business corporations. There were marine and agricultural societies, but then come corporations for land improvement, lumber cultivation, and inland navigation. For example, a "case near the line" is the River Machine Company, incorporated in 1790 to dredge the Providence River. "The merchants of Providence had agreed to raise $1,000 in forty ’equal shares’" for the project. The company was to collect tolls from certain vessels, but any surplus was to be used at the end of twenty years for other improvements. "Thus no dividends were contemplated."

In the American colonies were private corporations of many different types, alongside of unincorporated associations more numerous and varied. Most of the incorporated bodies were engaged in promoting ends which appeared to be of general public utility. This is true whether we consider the churches, which were so important elements in the social fabric of the day, the schools and hospitals, mutual benefit societies like the marine societies or the insurance and water supply companies, or even the most business-like of the business corporations. There are hardly any to be found which were so thoroughly "private" as probably the majority of corporations in the present day. Yet many have arisen in the colonies as private undertakings and been carried on under private control.

Public goods on the sea

National defense and lighthouses have been among the most frequently cited examples of public goods. In both cases, it is typically claimed that only a government can effectively provide them. However, maritime history, especially that concerning the age of sail, is rich with examples of privately supplied goods that today are often thought of as being "public".

Life at sea, especially in the days before steamships, radio, and radar, was remarkably close to life on the various land "frontiers". Governmental decrees often went unheeded, a high degree of self-reliance was taken for granted, reciprocal relations regarding benefits and responsibilities were the norm, and voluntary cooperation was very common. Perhaps above all, traditions provided a framework for solving problems and resolving disputes. Customary law, not authoritarian (or state-created) law, was normally the basis for conflict resolution.

One of the most instructive of all examples from maritime history is that of privateering, that is, the employment of profit-seeking, private armed ships during wartime. Privateers often had a significant, perhaps even deciding, impact on the course of wars between maritime nations. In Europe between 1600 and 1815, privateers "probably contributed much more than warships to the actual harm done the enemy". On the other side of the Atlantic, "without the presence of the American privateers in the Revolutionary War and the War of 1812, the United States would never have been able to hold off the British Navy".

Privateering disappeared precisely because it worked so well. It was effectively legislated out of existence in 1856 by means of the Declaration of Paris. The signatory nations wished to eliminate privateering, because it offered a low-cost but effective alternative to those nations who did not want to undertake the massive expenditures required by public navies. Privateering was not a market that can be shown to have ‘failed’.

The standard argument regarding lighthouses has been that, once the structure is built and as long as it is maintained, its service cannot be restricted only to those who pay for it. In short, there would be large numbers of "free riders". Therefore, private construction of lighthouses could never be profitable and must be a function of government. But, the building and operating of lighthouses by private firms and individuals was actually quite common. The owners of these structures gained their revenue from fees paid by shipowners, who benefited enormously from the service, so much so that they regularly petitioned the government to permit new lighthouses to be built. The lighthouses were built, operated, financed, and owned by private individuals, who could sell the lighthouse or dispose of it by bequest.

In the British Isles, the role of the government was limited to the establishment and enforcement of property rights in the lighthouses. Charters were dispensed to private entrepreneurs, who then charged fees for the service (a similar system worked in Canada). Not only did the British government often fail to initiate the building of needed lighthouses, it even resisted their construction on more than one occasion. By 1842 had the Parliament eliminated all private ownership of lighthouses. The shipowners, who paid the "light dues", lobbied for the change in the mistaken belief that it would result in smaller fees.

In the early United States, colonists frequently erected beacons and other aids for navigating the coasts. In 1789 Congress created the Lighthouse Establishment, which was given direct control over all coastal aids to navigation. But the new agency was burdened with bureaucratic problems, so little was accomplished until well into the nineteenth century, and of the existing lighthouses it has been said that they "failed in their primary purpose of guiding ships safely at night". At times, characteristics of existing lights have been changed without first informing the maritime community, sometimes with dire consequences. It was not until 1852 that the situation improved.

The old profession of piloting has been vital for maritime safety. Pilots, private suppliers who faced intense competition, would guide commercial vessels safely into and out of the port. The underwriters of marine insurance were often reluctant to insure vessels that did without a pilot altogether, or used a pilot whom the underwriters did not consider competent. Many took upon themselves the duties expected of the Coast Guard, helping ships in distress and rescuing passengers if they capsized.

Building levees

See also: Germany#Levees in Frisia

One typical and popular example of public goods is the case of dikes or levees. If a dike is built for one person, additional consumers can benefit from its services, i.e., protection from flooding. But once a dike has been built, no one living behind the dike can be excluded from its service, whether he participated in financing it or not. Hence, people would wait for others to build a dike hoping to enjoy it without having to pay for it. But when everyone waits, the dike that everyone needs is not built. This line of thinking ignores individual actions and motivations, and social pressures that may also come into play. People can decide to take the higher subjective risk or come to an agreement of sharing the burden.

Historically, as other public goods that allegedly need government provision, dikes have been built on the private market for a long time. In Germany, mainly in Frisia and Dithmarschen, the first dikes were built without any government help about 1,000 years ago. The population grew quickly in these very fertile areas made accessible by diking. As the population grew and became wealthier, monumental churches were built, symbolizing the success of private dike building. The newly diked areas were almost independent territories. Although they nominally formed part of the Holy Roman Empire, only in some cases were they required to support the army in case of war and pay taxes. They were autonomous with their own jurisdiction and diplomatic contacts. The land of the Fries was without a feudal order or without feudal overlords. Diking not only had the incentive to create new fertile and profitable land but also to create free land. Dikes were not only built without the state, but also can be regarded as seceding areas, that came close to private law societies.

See also

• Public Goods and Market Failures: A Critical Examination

Links

• Literature
  • "A Theory of the Theory of Public Goods" (PDF) by Randall G. Holcombe, 1997
  • "A Few Notes on Public Goods" by Art Carden, April 2004
  • "IP Rights as Monopolistic Grants to Overcome the Public Goods Problem" by Stephan Kinsella, December 2010
  • "On Takings and Public Use" by Stephan Kinsella, April 2005
  • "The Back Door to Socialism" by Chris Brown, December 2008
  • "Is High School Football a Public Good?" by Jim Fedako, December 2006
  • "The Public Goods of Tatum O’Neal" by Jim Fedako, November 2007
  • "Fallacies of the Public Goods Theory and the Production of Security (PDF) by Hans-Hermann Hoppe, Winter 1989
  • "Pareto Optimality, External Benefits and Public Goods: A Subjectivist Approach" (PDF) by Barry P. Brownstein, Winter 1980
  • "Public Goods and Externalities: The Case of Roads" (PDF) by Walter Block, 1983
  • "Ronald Coase and the Lighthouse" (PDF) by Frank Mixon, p.3-4, 1992
  • "Of Private, Common, and Public Property and The Rationale for Total Privatization" (PDF) by Hans-Hermann Hoppe, 2011
  • "Anarchism and the Public Goods Issue: Law, Courts, and the Police" (PDF) by David Osterfeld, Winter 1989
  • "National Goods Versus Public Goods: Defense, Disarmament, and Free Riders" (PDF) by Jeffrey Rogers Hummel, 1990
  • "Private Provision of Public Goods: Theoretical Issues and Some Examples from Maritime History" (PDF) by Larry J. Sechrest, March 2003
  • "Nonexcludability and Government Financing of Public Goods" (PDF) by Karl T. Fielding, 1979
  • "Empire: Public Goods and Bads" (PDF) by Christopher J. Coyne & Steve Davies, January 2007
  • "Wresting Land from the Sea: An Argument Against Public Goods Theory" (PDF) by Philipp Bagus, Fall 2006 (republished as Mises Daily here)
  • "Who Owns Water?" by Murray N. Rothbard, March 1956

• Other media
  • Public Spending and Public Goods lecture by Thomas J. DiLorenzo, August 2004 (YouTube)
  • The Public Good: As It Appears to Ceasar commentary by Robert LeFevre

• Public good theory at Wikipedia
• Public goods at Econlib