This will be the first of a two or three part series on public goods as inspired by Santiago’s recent post about the argument that entrepreneurship is a public good that is under provided by markets.
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I argue in “Public Goods” or “Good for the Public?” – Endogenizing Public Goods (currently under review) that our view of “public goods” as economists is fundamentally incomplete.
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Typically, we define public goods technologically, as any good that exhibits non-rivalry (my consumption does not prevent you from also consuming) and non-excludability (I cannot prevent you from consuming). Look in every economics textbook and this is what you will find, along with examples of parks, national defense, tornado sirens, etc. I call this the “exogenous” theory of public goods — we automatically know what goods are “public” by the very way we define them. Public goods theory and welfare economics argues that in the presence of goods with these features, markets under provide them and therefore the government must intervene somehow to increase provision because they are socially valuable.
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There are a number of problems with this view that many scholars have already found. I won’t spend much time on them, and simply catalogue them as follows (for references and elaboration, see the paper):
- Private markets and voluntary organizations do provide public goods
- Governments largely provide private goods, not public goods
- Many historical cases of government correcting market failures were just ex-post facto justifications for rent-seeking
- Impracticalities of mundane positive externality compensation
- Distortions of taxation and political allocation
- How do we know what is efficient/optimal?
One of the more fundamental issues is that somewhere along the way, economists in public finance and welfare economics conflated positive explanations of what government actually spends its money on with the theory of public goods–a normative theory of what government should do. (Perhaps here is where Santiago will argue this is precisely why we must jettison the normative theory entirely.)
What is a public good, much like the degree of the externality it poses, is often subjective. Suppose Bob is a fervent vegetarian, and does not believe anyone should be allowed to slaughter animals. Ann, on the other hand, is carnivorous and believes that everyone should be allowed to consume meat. To Bob, a law that prohibits slaughtering animals is a public good (under the exogenous definition): everyone can simultaneously enjoy living in a society where animals are treated ethically, and (assuming perfect enforcement) no one can prevent others from that enjoyment. Ann on the other hand, would view this law as a public bad, as it creates a negative externality (from her view) on everyone. Perhaps a law affirming meat-consumption, maybe even a subsidy to meat-producers, would constitute a public good for her.
Perhaps that example is silly and hyperbolic. But it can be applied to nearly any partisan wedge issue today and be perfectly accurate. Take gay marriage: opponents of gay marriage argue that a law permitting it would be a public bad and harm the very moral fabric of society, while proponents argue that having such a law would be a public good because everyone would live in a tolerant society (not to mention the concentrated benefits upon gay couples). Both of these arguments fit perfectly well within the exogenous framework of public goods (nonrival, non-excludable benefits/harms), but they reach contradictory conclusions (perhaps because they are arguing over different goods).
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For a more robust (and positive) view, I argue that we need an “endogenous” theory of government activity, that incorporates the fact that what goods are provided by the state is a complex product of political entrepreneurship and the very heterogeneous preferences I just described:
In laying out a theory of public goods, it might be useful to start with an analogy to the theory of private goods which may seem tedious at first: Oil in the ground is mere black goo. Were geologists or physicists to discover it first, they may derive technical and conceptual definitions for oil based on its chemical content, fluid dynamics, or other objectively verifiable characteristics. It takes a subjective act of entrepreneurship, however, to make that black goo into something of value for society (beyond mere scientific study). An enterprising individual must recognize, and personally bear the risk to bring about, in hopes of personal profit, the potential benefits of extracting, refining, processing, and selling oil and oil by-products to consumers and other firms as a fuel source to be used to power automobiles, factories, and the modern world. It requires integration with the current capital structure of complementary goods all calibrated to serve the demands of consumers through time. Entrepreneurship is what creates value from land.
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I propose that there is a similar analogy for those types of goods we colloquially call public goods. Welfare economists have formally conceptualized a type of good that exhibits certain technological features (jointness in consumption, high costs of exclusion), and defined it as a “public good.” Operationally, however, there is an implicit understanding that those goods that government provides are public goods, with the technical definition is not necessarily overlapping. Instead, it requires the acts of choice by individuals, that will affect others externally, to consider a good to be worth producing politically or privately. It takes an entrepreneur, often in the political realm, to recognize and bear an opportunity for personal gain, to convince members of the public (as voters, bureaucrats, legislators, firms) that a good must be provided by the government to meet the needs of society. As the realm of politics is largely one of language, it requires considerable rhetorical investment in the scientific language of public goods (the exogenous definition) in order to convince a sufficient number of people that they are “good for the public.” Thus, just as oil in the ground is only given value by private entrepreneurship, I argue that goods only take on “publicness” attributes by public entrepreneurship.
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