Francis I whiffs on water

This part of Laudato si’ has been on my mind recently, since a friend posted it on Facebook:

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Even as the quality of available water is constantly diminishing, in some places there is a growing tendency, despite its scarcity, to privatize this resource, turning it into a commodity subject to the laws of the market. Yet access to safe drinkable water is a basic and universal human right, since it is essential to human survival and, as such, is a condition for the exercise of other human rights. Our world has a grave social debt towards the poor who lack access to drinking water, because they are denied the right to a life consistent with their inalienable dignity. This debt can be paid partly by an increase in funding to provide clean water and sanitary services among the poor. But water continues to be wasted, not only in the developed world but also in developing countries which possess it in abundance. This shows that the problem of water is partly an educational and cultural issue, since there is little awareness of the seriousness of such behaviour within a context of great inequality.

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I thought this was a great illustration of how unintuitive economics is; the many learned minds in and around the Vatican make the same kinds of mistakes that the ordinary person makes. The Econtalk podcast of March 2, 2015 covered this exact topic very well. Two brief points:

1. How much water is everybody entitled to? For what uses? When can people bathe? Should the water in the shower cut off after two minutes? Is it some kind of moral law that families should all share the same bathwater? Saying “water is a right” is fine but gives us few clues about practical implementation.

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Farmers need to use more water than the rest of us, and in general the rest of us are happy about that because we value the produce. What about marijuana growers? Are they entitled to more water in the same way that spinach farmers are? Some of us value the produce of marijuana farms and some of us do not. I believe the Pope opposes marijuana farming, but he has now set up a situation in which differing beliefs about rights conflict with essentially no resolution unless we all buy into the whole package. (We don’t.)

2. Is the public funding of the provision of water the most reliable way to ensure that water is available for everybody? There’s a decent argument that municipal-level provision of water is usually the most efficient way to do it, which I will assume here to make things easier. In this situation, should the water be priced at zero? This encourages overconsumption and makes infrastructure maintenance and expansion less likely. Why economize on the use of water when there’s no difference to you in running the tap for 10 minutes or an hour? Where do the funds come from when maintenance or expansion are needed? Should the water authorities attempt to mimic market pricing to encourage better conservation and better infrastructure? That’s remarkably like making water a commodity, isn’t it? You could compromise between the two positions and price water below market but above zero. You can’t be half pregnant, but can something be a half commodity?

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Many areas that have zero-price water have said water in the city center and little or none in the outlying areas where the poor live. They still need water to survive, and water trucks supply them with it but at many times the cost that people with access to a working tap pay. Pricing water above zero/closer to market price would help them, not hurt them, since it would allow for better (or any) infrastructure to reach them. This infrastructure funding could come from other sources, sure, but which, and what would they give up instead? How much infrastructure should be built, and to where? Ceteris paribus it is costlier to live in barren desert than in well-watered areas; who should bear these costs?

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I began by saying the Pope makes the same errors ordinary folks do when it comes to economic topics. Thinking in moral terms is valuable, I agree, but only thinking in moral terms is a poor guide to how to organize the world, especially for large, complicated, impersonal systems. In this case it’s even worse. It’s counterproductive. In the long term treating water like a commodity leads to better outcomes—from the Pope’s perspective and from mine—than otherwise.

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I leave with my favorite Rothbard quote:

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“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

What is a Public Good, Anyway?

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):

  1. Private markets and voluntary organizations do provide public goods
  2. Governments largely provide private goods, not public goods
  3. Many historical cases of government correcting market failures were just ex-post facto justifications for rent-seeking
  4. Impracticalities of mundane positive externality compensation
  5. Distortions of taxation and political allocation
  6. 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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