Prof. Bryan Caplan

Public Choice Outreach Seminar

Summer, 1998

Public Choice and Public Goods

  1. Public Goods as a Rationale for Government
    1. Traditional question in both positive and normative political theory: "Why does government exist?"
    2. Extremely popular answer among economists (and growing periphery): "Government exists to provide public goods."
    3. What exactly are public goods? Public goods are "non-excludable" goods, goods that the producer cannot charge people for using (or otherwise restrict access).
      1. Most textbook treatments add a second characteristic ("non-rivalrousness") to public goods, but in my view this is both confused and confusing, since pricing above marginal cost is ubiquitous.
    4. If a good is non-excludable, so people do not have to pay to use it, then one would suspect that people will not pay to use it. And if no one will pay for it, one would anyone produce it?
    5. In consequence, a public good, however valuable, will not be produced (assuming, as economist usually do, that both consumers and producers are self-interested).
    6. Note Friedman's insight: "It is easy to misinterpret problems of market failure as unfairness rather than inefficiency... The problem with public goods is not that one person pays for what someone else gets but that nobody pays and nobody gets, even though the good is worth more that it would cost to produce." (p.278)
    7. The last step in the argument: Who does/should produce the non-excludable goods valued by self-interested consumers that self-interested producers will not produce? Government.
  2. The Public Choice Critique and the Public Choice Alternative
    1. The last step is the kind of non sequitor that public choice economists abhor. If everyone is self-interested, then that includes the people in the government. Unless it can be shown that it is in their interests to solve the public goods problem, government is no solution at all.
    2. Moreover, how does one leap from the existence of public goods problems to the conclusion that public goods problems are problems of markets? The definition of public goods is institution-free; it is a problem that could afflict any social organization, including the government.
    3. The sensible approach is comparative: One should compare:
      1. The magnitude of public goods problems of markets to public goods problems of government.
      2. The ability of markets to solve public goods problems to the ability of government to solve public goods problems.
  3. Comparative Institutions, I: The Magnitude of Public Goods Problems in Markets and Government
    1. Note Friedman's caveats about identifying public goods problems:
      1. Must distinguish benefits from external benefits. (E.g. education).
      2. Must include both positive and negative externalities in your calculations. (Important case: "pecuniary externalities").
    2. Public goods problems in markets?
      1. Some popular but dubious examples: education, health and safety, fire, R&D...
      2. Some popular and plausible examples: air pollution, national defense, highways and roads (especially local roads), law enforcement (especially victimless crimes)...
      3. Some unpopular but plausible examples (depending on the society): censorship, persecution of religious minorities...
    3. Public goods problems in government?
      1. Popular but dubious: pork barrel politics, special interests.
      2. Unpopular but plausible: Informed voting of citizenry (rational ignorance); issue-oriented voting of citizenry (rational idiocy). Neither pays with 100,000,000 or even 1000 voters.
  4. Comparative Institutions, II: The Ability of Markets and Government to Solve Public Goods Problems
    1. Joint causation, or "Why not evacuate Los Angeles?": As Coase saw, the inefficiency of public goods problems can be divorced from any issue of fairness, and this often makes solutions easier.
      1. Main Coasean insight: with zero transactions costs and private property, all public goods problems would be solved by bargaining.
      2. Corollary: eliminating property rights can turn any situation into a public goods problem. (E.g. provision of food).
    2. Market solutions to market's public goods problems:
      1. Most general: Have private property rights whenever possible, and don't restrict bargaining.
      2. The unanimous contract (condo association)
      3. The privileged minority (mowing your lawn)
      4. Bundling (commercials on radio and TV)
      5. Merger (orchard owner marries beekeeper)
    3. Market solutions to government's public goods problems: ?
    4. Government solutions to market's public goods problems: get around high transactions costs by coercion.
      1. Subsidize/mandate (national defense)
      2. Tax/regulate (air pollution)
    5. Government solutions to government's public goods problems: ?
      1. Constitutional reform is a popular answer, but there is every reason to think that constitutional politics works just like regular politics.
    6. Important: If the government is unable to solve the public goods problems of government (esp. citizens' lack of incentive to vote in an informed and issue-oriented way), then there is no reason to think that government will want to solve the public goods problems of markets that it can solve!
      1. This explains why most of what actual governments do has nothing to do with public goods: Social Security, Medicare, education...
  5. Conclusion
    1. Public goods problems exist, but they exist in both markets and government.
    2. The market is often able to solve its own public goods problems when private property and free bargaining is allowed, but high transactions costs make market solutions difficult.
    3. High transactions costs are no barrier to government solutions for many public goods problems, since government can simply use coercion.
    4. However, government itself suffers from severe public goods problems, especially in the election process. Thus government solutions for the market's public goods problems are purely coincidental, and most of the energy of government is spent on other ends - which may themselves create more public goods problems.
    5. Why does the world work as well as it does? Everyone isn't narrowly self-interested all of the time. Voluntary donations of wealth, effort, and decency somewhat mitigate the public goods problem in both markets and government.
      1. For further thought: Compare the relative abilities of markets and government to "economize on virtue."