PUBLIC GOODS, EXTERNALITIES, AND THE COMMONS

PUBLIC GOODS, EXTERNALITIES, AND THE COMMONS

Chapter 10 of Analyzing Politics  

K.A. Shepsle

 A Summary 

Public Goods and Politics

  • Public goods are nonexcludable (anyone can enjoy them whether they have paid or not), and nonrival (the use by one person does not diminish the availability of the good for se by someone else). The classic example is the lighthouse.
  • Because anyone can enjoy it, producers of public goods are reluctant to provide them as they cannot extract a payment for so supplying. Thus the amount supplied will probably be a lot less than the optimum based on what people would pay if they had to.
  • If the producer can be granted some sort of monopoly right then he will provide the good. E.g. if the lighthouse shows ships to harbour, and the owner of the harbour owns the lighthouse then he can charge extra for the harbour facilities and that way make a profit on the lighthouse. This only works if there are no competing harbours that could provide the services at lower cost free riding on the lighthouse owner’s provision of the lighthouse. Thus political protection of monopoly rights are important.
  • Individuals meanwhile are incentivized to use the goods without paying for them. Potential producers understand this and thus will not produce unless they can find some means to elicit contributions.

 Public Supply

  • Public goods then may be undersupplied relative to what society demands. An alternative is to let the government provide them as it can compel contributions through taxes. This is not as neat a solution as it may first seem, as public good provision by government is generally the fruit of some collective action that encourages the government to provide that particular good. So if the public good benefit is distributed widely and irrespective of whether an individual contributed to arguing for it, then free-riding will occur, and collective action will be hampered. Various select incentives etc. could be offered.
  • These collective action problems are problems relating to consumption. Here large groups of consumers of public goods are unable to organize to argue for them. However, public goods are not just consumed, they are supplied. The government does not literally make the concrete used to build a network of roads; the work is subcontracted out. These subcontracted groups benefit greatly from providing the public goods to the government, and as they are smaller privileged groups they will not be subject to the same type of collective action problems as the consumers. Thus various interest groups that represent producers are likely to argue for public good provision.
  • Yet government provision is not a simple option. Whilst legislators may generally approve of producing public goods they may be more concerned with getting $s to their constituents to improve reelection chances. Thus public good provision may be less efficient due to these distracting factors. Additionally, many public goods works take a long time to materialize, much longer than the time horizon of the regular politician. This can incentivize them toward flashy short term projects rather than long term successful provision. The drive to privatize has occurred partly in the hope that the private sector incentives will be better aligned to social objectives than under the former direct public provision.

 The Commons

  • If each villager is contemplating adding a head of cattle to graze on a common piece of land he does not take into account the cost of doing so. If the common is large and the village small this will not be a problem. But if demands on the common grow and now villager has an incentive to restrict his use, the land will be overgrazed and ultimately destroyed. This is what Hardin called “the tragedy of the commons”.
  • This is a problem of private and social incentives. Socially everyone knows that if they all graze an extra head of cattle they will all lose, but privately everyone knows that if they add just one more head there will be a negligible difference, they themselves will be better off, and no one will suffer. But as everyone faces this prisoner’s type dilemma, the result is overgrazing.
  • The problems relate to imperfect property rights. If everyone owned well defined plots, or someone owned the whole common there would be the incentives associated with private ownership of a private good, and this means preserving the value of the asset. An individual would not overgraze his own land in the absence of strange circumstances.
  • Ostrom outlines ways of dealing with the commons problem without reverting to private ownership. These are mechanisms that have clearly defined boundaries, a congruence of rules, monitoring arrangements, graduated punishments for defectors, and low cost means of resolving disputes. In other words managing a commons is a political problem – cooperation is required for preservation, and thus some form of political agreement regarding self-restraint is needed to prevent tragedy.

 

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