Why government? Public goods

A while back in the course of a comment thread for a HoCo Rising post I promised to write more about my political views, so that people could decide whether I was a rabid lefty or just a wimpy lefty. Rather than do this in an organized way (these are the things I believe, this is my position on the Nolan chart, and so on), I thought it would be more fun to expose my beliefs in a more informal and indirect way by commenting on various issues that have come up on local blogs. (Warning: This is to a large degree me thinking out loud, so don’t expect it to be either totally comprehensive or totally coherent, just expect it to be long.)

For the first set of posts I’m going to give some off-the-cuff opinions on why government exists and what its proper roles should be. We’ll start off with the preamble to the US Constitution, which touches on most if not all of the themes I’ll be discussing:

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

(Note that I’m not a big Tea Party or Glenn Beck fan, but I do agree with them that everyone should be familiar with the Constitution, especially with the Preamble, which pretty much lays the groundwork for everything else, is much more inspiring than the parts about letters of marque and reprisal and the like, and lacks the morally repugnant cynicism of the whole three fifths of all other Persons business. And as a bonus, if you study up on the preamble you can avoid the sad fate of Barney Fife.)

In this post I’ll pivot off a question that Trevor asked in response to my post about the Maryland broadband grant. Trevor’s immediate question was about the extent to which government could improve the economy by spending tax payer dollars; that’s part of a broader question regarding whether and where the government should get involved in providing various goods and services. One conventional approach to thinking about this question is based on the idea of public goods, and since I’m an unoriginal thinker that’s where I’ll start as well.

Since this is a Howard County blog let’s take a Howard County example, and a timely one at that. This weekend thousands of people will descend upon Columbia for the Virgin Mobile FreeFest. As part of the festival the attendees will have an opportunity to buy food, drink, and other products. These are what economists call private goods, and have two key characteristics: Only one person can consume a given good (the beer I drink is a beer you won’t be drinking) and one person can exclude another from obtaining the good (beer doesn’t rain from the sky for all to enjoy). In economist-speak such goods are rivalrous and excludable, and as such they are well suited to be bought and sold via a free market: That beer is excludable means that I can’t get a beer unless I pay the brewer (directly or indirectly), and that beer is rivalrous means that everyone has to buy their own bottle, to the brewer’s benefit.

So, here’s our first principle: government shouldn’t be involved in the production or sale of private goods. In other words, government shouldn’t be socialist (public ownership of the means of production being the very definition of socialism). With some minor exceptions (temporary takeovers of banks or—more recently—GM) and a couple of major exceptions (public education and public hospitals such as the VA system) the US has never had a socialist economy. Despite what some people think, it almost certainly never will, real socialism having exhausted whatever political appeal it might have had in the US in the early part of the 20th century. (As Crocodile Dundee might say, That‘s not a socialist, … that‘s a socialist.)

Does that mean I think that public schools, public hospitals, and so on, should all be privatized? Not necessarily, but that’s a discussion for another post. My point is simply that if private goods are involved then government should have some truly compelling reason for its involvement. In some cases there is no such compelling reason, for example the government-run liquor stores found in various states (like Virginia) and counties (like Montgomery). Governor McDonnell is trying to privatize the Virginia stores; would that Montgomery County would do likewise.

Now back to the Virgin Mobile FreeFest. What about the festival itself? The music at the festival is not a rivalrous good in the same sense as beer: My enjoying listening to a band doesn’t preclude a few thousand other people enjoying the same experience. But the FreeFest is still an excludable good: Big burly folks with tattoos won’t let you come in and enjoy the FreeFest experience unless you have a ticket. Such non-rivalrous excludable goods, sometimes called club goods, are also well-suited to the free market, since the excludability means that the producer can still charge the consumer for access to the good. In fact, the non-rivalrous nature of the good can actually improve the producer’s ability to make money, since they can serve significantly more people without greatly increasing production costs. In the case of the FreeFest they could keep expanding the audience without the bands having to work any harder, up to the capacity of the venue.

So here’s a possible second principle: Just as government shouldn’t be involved in the production and sale of private goods, it also shouldn’t be involved in the production and sale of club goods. More simply, if you can sell a ticket or entrance fee to it then government shouldn’t be directly involved in it. This would include government-run or -funded arts events, sports events, fairs, and so on. Again, this doesn’t necessarily mean I’d oppose each and every instance of these, but they’d face an extra burden of justification as to why they’re a good investment of government time and money.

Let’s turn now to another downtown Columbia event, the annual Fourth of July fireworks display. Like the FreeFest, this is a non-rivalrous good: My enjoying the fireworks doesn’t prevent you from enjoying them. However unlike the FreeFest the firework display is a non-excludable good: Anyone in the vicinity of Columbia’s downtown can enjoy it to one degree or another, whether they’re at the lakeside or over at Howard Community College or just driving down US 29. In economists’ definitions, public goods are exactly and only those goods that are non-rivalrous and non-excludable, like the fireworks.

A central economic problem with public goods is the possibility that a free market won’t provide them, or at least won’t provide enough of them to meet demand. For example, leaving aside the relative appeal of fireworks vs music, why isn’t there a Virgin Mobile FreeFireworks? One issue is that at the FreeFest there’s a much better opportunity to sell VIP tickets (can’t get in without them), to sell drinks and food (can’t bring in your own), and to subject attendees to advertisements from sponsors (can’t escape them). Sponsoring a non-excludable event like a fireworks display is a much less attractive proposition for a business. If the free market under-supplies a given public good, then the obvious question is whether the government should step in and provide it instead.

A classic example of a desirable government-provided public good is security, one that’s highlighted in the Constitution’s preamble (provide for the common defence). Why security? One reason is the need for a division of labor: if everyone has to stroll around their properties all day protecting their families and their homes, they’re not going to to have much time left over for any productive work. But division of labor by itself is not sufficient to justify government action; after all, everybody could just hire private security forces. The real issue is the free rider problem: If all your neighbors are paying for private security, and the presence of their security forces improves your security as well, you have less incentive to pay for private security yourself. Everybody else can go through the same calculation, and the net effect is that there would likely be less security paid for than would be optimal given everyone’s preferences.

The conventional solution is to establish a government, support it through mandatory taxation, and give it a monopoly on the use of force; this solution was practiced at pretty much all times and places once agriculture was invented and people had to stay in place and thus were more vulnerable to predation. The advantages of such an arrangement were so great that historically even societies whose rulers greatly oppressed the populace (e.g., through levels of confiscatory taxation well beyond the dreams of any modern politician) could achieve levels of productivity greatly in excess of those societies without active governments.

So much for security. Are there other public goods that it would make sense for government to supply, or at least to subsidize? One major one is knowledge, particularly scientific knowledge. Basic research into questions of mathematics, physics, biology, etc., doesn’t typically lead to any near-term benefit, so most businesses see little or no point in funding it. Prior to the 19th century most scientific research was funded by wealthy individual patrons, typically kings or other aristocrats. The US, not having any aristocrats, eventually saw fit to provide government support of research through such organizations as the Smithsonian Institution (established in 1848), public research universities (arising out of the land-grant college system established beginning in 1862), the US Geological Survey (established in 1879), and eventually after World War II a network of national government laboratories, research institutes, and funding agencies.

Others may differ, but I think it’s more than apparent that government funding of basic research has been a wise investment of taxpayer dollars over the years, improving the nation’s security, its economy, and the health of its people, and in general helping to fulfill the promise of the Constitution’s preamble to promote the general Welfare. Are there other public goods of this type that the government should provide or at least subsidize? In general any information-based good is a public good in the strict sense, particularly in digital form; this includes the ideas underlying technological innovations, artistic works of various types (fiction, poetry, art, music, etc.), and computer software. I’ll address each of these briefly:

Technological innovations (as distinct from basic research) are generally adequately supplied by the free market; in the US government has funded some of this (for example, supporting manufacturers of electrical vehicles), but I’m personally dubious about how much it makes sense to do so. Artistic works and presentations thereof are also in good supply (a lot of artists would create even if they weren’t paid, or paid poorly) and where under-provision might exist I don’t think it’s really the government’s role to make up the difference. I’m thus happy to leave funding of the arts to either commercial interests or to private philanthropy by wealthy individuals or not-so-wealthy individuals (e.g., through such mechanisms as Kickstarter). (Funding of arts education in schools is a separate issue; it’s more in the nature of an investment in people who might go on to productive work in various creative industries.) Finally, in a previous post I advocated that government consider funding creation of open source software, at least in areas like information security that bear a reasonable relation to government’s purposes.

Beyond information goods, which are 100% non-rivalrous and non-excludable in their pure form, there are other goods, such as the public roadways, which are to some degree non-rivalrous and non-excludable. For example, my using the roads doesn’t prevent you from using them, at least as long as the roads are not congested, and with some exceptions like toll expressways (such as the ICC) it’s relatively difficult to exclude individuals from using public roads. Building and operating roads has conventionally been a function of government, and it’s probably best to have it stay that way: Building roads is not rocket science beyond the competence of government, making a profit on roads (as would be necessary for a commercial firm) requires additional measures (e.g., adding toll booths, E-ZPass systems, etc.), and governments can use the power of eminent domain to avoid problems in acquiring rights of way. There have been experiments in privatized roads, but the results have not been universally acclaimed.

After discussing information and highways, what better topic to conclude on than that hoary cliche, the information superhighway, better known as the Internet. I noted in my post about the Maryland broadband grant that I thought it was a good investment of taxpayer dollars. That’s so even though in general the Internet has been successfully built out by private operators (admittedly after an initial period of fairly significant Federal funding). What sways me about the broadband grant is that for the most part it’s not really attempting to substitute for free market activities. The vast majority of it is simply the government building a network for its own use, to help make its operations more efficient and cost-effective, for example by supporting telephone service over its own data network (so-called voice over IP or VOIP service) instead of paying for business phone lines. The network (or at least parts of it) will also help provide broadband service to the business and home markets, but this is true only in areas outside central Maryland where it’s not been cost-effective for commercial providers to offer truly high-speed service. (And even in those areas government is not attempting to directly provide service, but rather is providing network capacity that private operators can leverage.)

It’s late, my laptop battery is dying, let’s wrap this thing up. To summarize:

  • Private goods should be provided by the market, unless there are compelling reasons for government to get involved.
  • Club goods should also be provided by the market, again unless there are good reasons to do otherwise.
  • Public goods should be provided by government if their provision serves public purposes (provide for the common defence, promote the general Welfare) and if demand for them would not otherwise be met by the market. Security and basic research definitely meet this test, and roads and other public physical infrastructure do as well. Software and digital infrastructure meet the test only if they’re recognizably connected to the business of government, and funding for the arts does not meet the test at all in my opinion.

Although there’s a lot more to be said about the general topic of government provision of goods and services (for example, what about public parks?) this is more than enough for one blog post. In future posts in this series I’ll take a look at other roles government can (and where appropriate, should) take on.

9 thoughts on “Why government? Public goods

  1. JessieX

    You so rock, Frank! From the day I “met” you online til this one here, I continue to be expanded and more aware by being able to see through your eyes. Thank you for taking the time to organize your thoughts so logically and eloquently. And publicly. ;-)

  2. Keith Wansbrough

    What about the fourth quadrant: rivalrous, non-excludable goods? I guess that includes things like welfare, rescue, fire departments, emergency health care, and so on. It seems that the government should be involved in those too, by your argument, I think.

    1. hecker Post author

      Keith: You’re right, I left out rivalrous non-excludable goods, aka common goods. Part of the reason was space, another part was that a lot of the best examples of common don’t involve actual government provision of goods. For example, in a Maryland context crabs are a common good: a crab I catch is a crab you can’t catch (rivalrous), and absent some sort of intervention it’s difficult to impossible to keep people from going crabbing (non-excludable).

      This is the classic “tragedy of the commons” scenario (everybody’s motivated to catch all the crabs they can, until there are no more crabs for anyone to catch), and one possible solution is government regulation (i.e., licensing of crabbers, individual catch limits, overall quotas, etc.). However other possible solutions exist, including voluntary arrangements among crabbers, enforced within the group with minimal or no government intervention.

      In this post I was focusing on cases where there was some justification for government providing a good, whereas with common goods the focus is often more on government regulating access to the good. For example, emergency care could well be provided solely by private hospitals, with government simply laying down rules related to access to care.

  3. Pingback: Public, private, and club goods in downtown Ellicott City « Frank Hecker

  4. Matt

    This is refreshingly lucid and I really appreciate its tone. I’d love to read more in the series! In particular, it seems to me that there is a category of rivalrous, excludable goods the absence of which are life-threatening (i.e., food, water and, arguably, health care) and that shouldn’t necessarily be provided by government but which don’t seem to get to the consumer in totally acceptable ways under the powers of the free market alone. (I’m thinking specifically about the on-going health care debate and the mounting questions about industrial food production.) What considerations help us reasonably draw the line in such cases, or in the related cases where mistakes or misdeeds by free market entities can result in major consequences to the public?

    I very much appreciate your approach and would love to hear your thoughts.

    1. hecker Post author

      Matt: Thanks for stopping by and commenting; I’m glad you enjoyed the post. I do plan to continue the series, although I don’t know exactly when I’ll be able to post next.

      I’ll have to think about your question. Part of the answer may lie in distribution mechanisms; for example, delivery of water to homes is a “natural monopoly” in ways that delivery of food is not, and hence we might expect more government involvement. For health care it’s possible that a better framing is in terms of fairness and justice (which some would invoke to justify taking money from Peter and spending it on Paul–or letting Paul spend it himself).

  5. Trevor

    Frank,

    I loved this post. Can you please put all your posts together and publish a book? Or even better, can you teach a class at HCC on economics and political science? I would sign up for that class in a heart-beat.

    I have to ask, what is your educational background? You clearly have a fantastic understanding of a variety of government and economic issues.

    1. hecker Post author

      Trevor: Glad you liked the post. To answer your questions: First, I’m not sure I’ve had the time or energy to adapt this material into book form. However all my stuff is published under a license that allows other people to do this if they’d like, without needing any further permission from me. Check out the “steal this blog” page linked to in the upper right of this page.

      As to my educational background, I was an applied math and physics major; I have no special training in economics or political science. I just read Wikipedia articles and do a fair amount of googling :-)

  6. quenee

    Why is user fees imposed for the use of public goods and what might be some political reasons behind government ownership of such public goods

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