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Long-time readers are well aware of my extreme aversion to the blind invocation of “public goods problems” as either proof that freedom of exchange is a miserable rule by which a civilized society might operate or as justification for the government to expand its reach into more and more activities. More often than not, the folks who espouse “public goods” arguments have little understanding of the nature of the problem, or its potential “solutions.” That said, I’ve encountered a rather novel invocation of this idea recently. The idea is that markets themselves are a public good, and since voluntary exchange itself is a public good, then it is incumbent upon government to intervene (incidentally, this was the justification I was given for increasing the rates of taxation on rich Americans).

What to make of this?

Let’s briefly describe what a public good. The term “public” does not refer to the ownership of the good by government or by individuals. The economic interpretation of the term public refers to the degree of exclusivity of the good in question. Exclusivity here indicates the ease with which we can prevent non-payers from accessing the good. Therefore, if I am a farmer selling apples at a farmers’ market, the apples are very exclusive – I simply do not give any to people who do not pay for them, and it is very difficult for people who do not pay for them to enjoy apples. On the other extreme, I suppose you might consider “viewing a good looking person” to be a pretty non-exclusive good. It would be rather hard, as an attractive person, to prevent “non-paying” customers to pass a glance at you when you walk down the street.

What is the economic problem with non-exclusive goods? It is that “we” might have them under-provided in a system of voluntary exchange. Since producers of such goods (e.g. pretty gardens, neat physical appearance, etc.) cannot capture the full value of the things they produce, then we will get too-little of them produced from the standpoint of the non-individual. The standard text-book idea then (one which I attack in myriad places on this site) is that the government should levy taxes on all citizens, and use them to provide the good itself, or to levy taxes on all citizens and then use the proceeds to subsidize the producers of the good (there are other possibilities, but let’s leave those out for now). Notice however that nothing in this theory says anything about taxing the rich more than the poor. The public goods argument is not a distributive argument but rather an allocative one. Again, this is something that advocates of government intervention on these grounds completely overlook or mistake when using such arguments in the context of discussions on why inequality is bad.

I’d note the irony here. For those who wish to invoke public goods arguments, they are, by definition, claiming that people have a right to property. Why that is ironic is that those most fervent dispensers of these ideas are in fact those most hostile to natural rights arguments and the legitimacy of private property. If people do not have a right to the value of their produce, then the underprovision of such produce should be viewed as virtuous to these folks. In other words, wouldn’t free-riding be the desired outcome? Don’t let that incoherence stand in the way of scientistic arguments. Let’s proceed as if there was no such conflict.

The seriousness of the public goods problem turns on how rivalrous in consumption the good is. Some goods, such as apples, are completely rival in consumption. When I consume one apple, there is one less apple for everyone else to consume. Therefore, if apples were non-excludable, we would have a very serious economic problem. There would be way too few apples for everyone else. If, however, the good in question was non-rival in consumption, then the nature of the problem changes. For those goods, when you consume a little bit more of it (as a free-rider) you do not diminish how much is available for everyone else. In this case, the challenge in providing the public good is far less difficult than when the goods are rivalrous. Why? Suppose the good in question is “viewing a pretty garden.” When you view my garden, that does not make it harder for someone else to view my garden. Thus, the challenge to this “market failure” is not how to get everyone to contribute to the production of my garden, but merely how to get a few avid demanders to contribute to the production of my garden. You see, if a garden-lover is satisfied by how big and how nice a garden I plant, then it follows that less avid demanders also are satisfied by the level of provision.

There are also a whole host of other reasons why goods that are nonexclusive in nature may turn out to be less “public” than standard criticisms suggest. One is that if the nonexcludable good can be easily bundled with some other good that is excludable and desirable, then the good is likely to be provided in an optimal amount. Another reason is that just because a good is non-excludable does not mean that an efficient amount will not otherwise be privately produced. There are several other arguments.

That was a very long introduction, so I’ll leave it to tomorrow’s post to apply these ideas to markets as public goods.

2 Responses to “Markets as Public Goods, Part I”

  1. Michael says:

    Does this mean that society under produces good looking women?

  2. […] we described the nature of the argument for government intervention into a voluntary exchange order. Today, let’s direct our attention […]

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