Arnold Kling  

Public Goods, Externalities, and Education

My Answers to My Questions for... Fear of Looking Rich Redux...

Bruno S. Frey and Reiner Eichenberger write,

externalities are not technologically but rather socially determined. There are no inherent properties of a good or service producing external effects, therefore, citizens have to use the political process to determine what is to be considered to be an externality.

I tend to use "public good" and "positive externality" interchangeably. The idea is that Sally and Tom benefit from the actions of Joe, but Sally and Tom do not compensate Joe for those benefits. A wise and omniscient government needs to step in and tax Sally and Tom to subsidize Joe's actions.

If I provide a private security guard to patrol the neighborhood, the neighbors who don't pay for the security guard nonetheless cannot be excluded from enjoying some of the benefits. Moreover, the benefits that they get from the security guard do not detract from the benefits I get (i.e., our consumption of security services is "non-rivalrous"). Non-excludability and non-rivalry are thought to be conditions of public goods.

Even though the security guard is not excludable and non-rivalrous, it may not be a public good. Perhaps I get enough benefits from the security guard that I am willing to pay for it, without needing contributions from the neighbors. In that case, the positive externality is not big enough to worry about. Conversely, the total value of the security guard to everyone may be less than the cost of providing it. In that case, we should not collect taxes and pay for the security guard.

For education, the positive externality is the benefits that accrue to me from your education. I think that those benefits tend to be pretty small. You get a higher income, and most of those benefits flow to you. I get some of the benefits, because you are more likely to pay taxes and less likely to require government transfers, so that my tax obligations can be correspondingly reduced.

You also get the consumption benefits of your education. I personally don't benefit from your experiments with drugs, sex, rock'n'roll. Nor do I particularly care that you take a class in art appreciation or get tickets to your school's basketball games.

Finally, you are supposed to be a better citizen because of education, and I should be happy about that. But if what you learn is that profits are evil, man-made global warming is beyond doubt, and it is wrong to question that gender differences are socially constructed, then from my perspective your education is not making you a better citizen.

If the higher income that you get from education is due to its signaling effects, then that is a classic negative externality. The investment in the signal is wasteful, and your investment forces others to make a wasteful investment.

On the whole, the case for taxing education rather than subsidizing it is really quite plausible. It is counter-intuitive, perhaps, but the case for free trade is also counter-intuitive to most people.

The Frey-Eichenberger quote is from p. 30 of The New Democratic Federalism for Europe, where they lay out the idea of FOCJ, which stands for functional, overlapping and competing jurisdictions. It's a form of competitive government. So far (I'm only about a third through the book), they seem to avoid solving the three tough issues with competitive government in general and their idea in particular. These questions are:

1. How should income redistribution be handled?
2. How should paternalism be handled?
3. What should be the process for determining what is or is not a public good?

The quote above pertains to the third problem.

For the first problem, if you have many government agencies pursuing income redistribution, you could get messy results. For example, in the U.S., there are so many programs that have income cutoffs that the marginal tax rate on poor people is alarmingly high.

The second problem, paternalism, crops up because with FOCJ people are supposed to be able to opt out of "one-size-fits-all" programs like Social Security. As long as you're at least a little paternalistic, you worry about what they will opt into. But which government agency is in charge of determining how that paternalism applies?

COMMENTS (13 to date)
Adam writes:

The converse of the security guard is also interesting. If you install an alarm system, it makes it more likely that a burglar will attack the home of a neighbour. That would make it a negative externality.

Ryan writes:

Thanks for clarifying what is a public good. This makes your previous post much more understandable, at least from my perspective.

David Friedman is famous for pointing out that the externalities from more education could well be negative. That a well educated population might be better at rent seeking.

We wouldn't have to look far for prominent examples; were the externalities of Barack and Michelle Obama's education negative for Chicagoans? Now that the U of Illinois is allowing researchers access to the Chicago Annenberg Challenge--chaired by Barack Obama--we probably can put a number on it.

At risk of harping on something that's not the subject of the post:

Arnold asks: "How should income redistribution be handled?"

This is the second time in a week I've seen a supporters of free-markets use the term "redistribution" when connected to income. And I'm pretty sure that in both cases, the authors do not believe that income is "distributed." (Especially this case, as Arnold knows much more than I do about economics and surely other issues as well.) Rather, income derives from creating wealth.

So this is partly a pet peeve of mine, and also a concern that words are important, and the terms we use frame the debate. For example, with education, I say "government schools" instead of "public education." It's more accurate, and still unbiased.

So doesn't using the term "income redistribution" grant the premise that (something) distributed income in the first place, and hence make coercive "redistribution" by politicians sound more legitimate?

Yet, with my criticism, I'd like to propose a pithy alternative phrase, but am at a loss. The ones I can come up with are probably too value-laden, e.g., legalized robbery. Congress does have an "appropriations committee" though.

Suggestions? Or does no one else care?

Arnold Kling writes:

I agree with you that the term "income distribution" is pretentious. Unfortunately, it is a useful shorthand.

Snark writes:
Yet, with my criticism, I'd like to propose a pithy alternative phrase, but am at a loss. The ones I can come up with are probably too value-laden, e.g., legalized robbery. Congress does have an "appropriations committee" though.

Suggestions? Or does no one else care?

I think "extortion" fits like a glove.

Stefano writes:

"Distribution" doesn't necessarily imply that it's the result of someone or something intentionally distributing. It may be the result of a natural process.

For example the geographic distribution of an animal species, or a statistical distribution.

Horatio writes:

Does this apply to all education? In a society where basic education was not subsidized, I could easily imagine the lower classes foregoing schooling for their children.

scott clark writes:

I disagree about the security guard. I don't quite understand why you would want to task him or her with patrolling your whole neighborhood, but his presence may discourage criminals, and thus benefit your neighbors and be non-excludable, but I don't think consumption of the security is nonrivalrous. If the security guard is dealing with an issue in one part of the neighborhood, he is necessarily not dealing with any issues in another part of the neighborhood. He can't be in two places at once, so, while it probably won't come up, two crimes at the same time, the security guard is not truely non-rivalrous. Even if the crimes happen one after the other, the fact that the security guard dealt with the first one may make him less able to deal with the second one, he may be more tired, more prone to making a mistake, less able to focus on the new threat. Hard for me to see why this meets both criteria for a public good.

the same goes for national defense. there may be an aspect of non-excludability, but not non-rivalry. Tanks and planes in Alaska, and missle defense in Poland, don't actually directly protect Fairfax. They may get tasked to protect Fairfax, but they had to be taken from somewhere else. The Pentagon gets to do the allocation, and thus a rivalry is set up for the consumption of those resources, and the Pentagon decides what gets protected, and what gets left more vulnerable.

Interesting. Could we look at luxury taxes as taxes on those status-signals that are classic negative externalities?

eccdogg writes:

"Yet, with my criticism, I'd like to propose a pithy alternative phrase, but am at a loss. The ones I can come up with are probably too value-laden, e.g., legalized robbery. Congress does have an "appropriations committee" though.

Suggestions? Or does no one else care?"

How about "Wealth or Income Transfer" not too value laden and covey's what you are doing transfering from one person to the other.

Arnie Kriegbaum writes:

On education and externalities, I am challenged to consider your idea that it is not really a public benefit. OK, from a taxation standpoint it might not be. But if my neighbor's son becomes a brain surgeon and 10 years from now removes my cancer, I would rather live in a society of educated, skilled people, than in one in which my neighbor's son only becomes something less skilled and I then die of brain cancer. I know this is simplistic. As I write it, I now see that perhaps it lends even more fuel to the "tax education" line of reasoning.

Anon writes:

Don't forget that education increases skilled labor so more wealth can be produced and education also lowers crime rates. Those are pretty large benefits if you ask me.

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