Bryan Caplan  

Down With Public Goods

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Every economic educator should immediately read Frances Woolley's working paper, "Why Public Goods are a Pedagogical Bad."  The conflict between the official definition of "public goods" and the actual use of the phrase has long troubled me.  But Woolley explains the trouble far better than I ever have. 

First big problem: The concept of "public goods" is pedagogically confusing.
The public goods discussion violates the first basic pedagogical principle: explain one thing at a time. Confounding rivalry and excludability, it attempts to teach these two analytically, empirically and economically different concepts together. The problem of public finance and the problem of the definition of property rights are confounded into one lecture, one chapter, what seems to be one idea. Moreover, to the extent that the pure public goods discussion ignores goods that are rival but non-excludable, or goods that are non-rival but excludable, the implications of rivalry or excludability are not fully discussed. Hence the second pedagogical principle, begin with basic concepts and work upwards, is violated.
Second big problem: The concept of "public goods" is usually misapplied.
The concept of excludability, as defined in public goods textbooks, is based on technology, that is, whether or not it is technologically feasible to exclude those who do not pay from using the good. However technological feasibility is a hypothetical construct. For example, the streets of New York are excludable if it is hypothetically possible to require people to pay a toll in order to drive a car in Manhattan. A few years ago, many might have agreed such a charge was infeasible; the successful introduction of the London congestion charge suggests that it is not. Because actual exclusion is so much easier to conceptualize than hypothetical excludability, students and others tend to assume, incorrectly, that goods supplied free of charge by government, such as (in many countries) health care, bridges or education, are public goods. Non-excludability is confounded with public finance.

Most publicly-funded health care treatments (pharmaceuticals, chemotherapy, hip replacements, and so on) in wealthy countries are not "public goods" as economists use the term because it is easy, from a technological point of view, to deny people access to, say, coronary-bypass surgery. Toll-booths can be erected on bridges. For education, too, it is straightforward to deny people access (and, in any event, education is, like health care, rival). Yet the confusion between the theoretical concept of public goods and the notion of public, free provision has a long history in the literature. The classic paper on public goods, Samuelson (1954), is "The pure theory of public expenditure." It formalized what is now known as public goods theory as a way of explaining public expenditure. The two have been confounded ever since.
Woolley goes on to offer three explanations for this misleading concept's memetic success.

1. Intellectual lock-in.  "Academic publishers wish to appeal to the widest possible audience. As long as there is a perception that the average public economics instructor wants a chapter called 'public goods,' textbooks will include such a chapter."

2. Demagogic equivocation. "To call these [stuff that sounds good] public goods somehow seems to imply that they are 'good' as in good, desirable things, and 'public' in that there is a role for public involvement."

3. Economists' distaste for appeals to equity. "[P]ublic goods theory appears to offer the promise of turning equity arguments into efficiency ones."

My only serious quarrel with this working paper is that it never discusses, or ever mentions, Social Desirability Bias.  But hopefully that will make it into the final draft.

HT: Nathaniel Bechhofer


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COMMENTS (14 to date)
ThomasH writes:

No problem with improving terminology. I'm pretty sure I have used "public good" wrongly. I did have a dissent from the one sentence in the abstract:

The ultimate aim of an undergraduate course in public expenditures should, I argue, be to explain government spending.

Unless it amounts to the same thing, I say the objective especially of an undergradute course in public finance (tax and expenditure) would be equip the student to understand and make arguments about public finance issues. Understanding how they actually are made is only part of forming an opinion about how they should be made.

Jim Dow writes:

I can see a lot of value in not combining excludability and rivalness but I’m not sure treating public goods as externalities (which the paper suggests) is any less confusing. The benefits of national defense are external to whom, or rather, who is the individual they’re internal too? Seems like an awkward way to do it.

The thing is, public goods were once a pretty good theory of government expenditure. National defense was most of the story, with roads and public safety being important at the local level. Motives have changed over time with redistribution now being the bigger part of spending and that evolution is probably how things should be explained. Of course, the author is right in that classroom economists don’t like to talk about the politics of redistribution.

Now, if we can only do something about the term “rents”.

Sam W. writes:

For what its worth my undergrad education (~5 years ago) focused on the feelings of people. The provision of healthcare isn't a "public good", living in a society where people don't die from lack of healthcare is. We also discussed how technology could change the standards for whether something could be excludable , e.g. regular radio to satellite radio.

Glenn writes:

For what its worth, as an undergraduate I never had education, healthcare, or even roadways offered as examples of public goods.

The quintessential examples seem to be (common) security and defense. These are practically unexcludable and nonrivalrous.

I suspect the provision of redistribution and social insurance at the federal level is disconnected from classical theories of public expenditure. But if we exclude these items from the government budgets, we would likely find remaining (federal) expenditures rapidly converging on the public ideal - defense and security, with some roads and infrastructure on top.

There is voter value in mitigating economic risks and providing for some lifestyle equity. We don't pretend that these are "efficient", but rather that the costs are worth paying when weighed against the alternative (risk of destitution in retirement/disability/etc, the poor dieing in the streets without access to healthcare food or shelter).

My great complaint with the "soft" presentation of the concept of public goods to young economics students is that the language is general enough that it can be tortured to fit any scenario. All of a sudden, everything becomes a public good. See Sam's post above. This is a failure of instruction, since the theory is highly specific and quantifiable, and clearly does not capture "living in a society where people die from lack of healthcare". We might find such societies both "public" and "good" (in the philosophical sense of the words), but healthcare is - as the post explains - rather trivially nonpublic, in the economic sense.

Jim Dow writes:

The feelings argument seems tricky. The happiness I get from living in a society where people don't die from a lack of healthcare is clearly both non-rival and non-excludable so technically fits the definition. The goods themselves are private but the feelings about the goods are public.

Perhaps the reason is that we put arguments based on feelings in a different category than arguments based on goods. As Glenn says, if we include feelings then everything can become a public good, at least in principle. In practice, we probably all have beliefs about which feelings are valid and which are not, but we push that question over into moral philosophy.


Nicholas Weininger writes:

To be fair, the more sophisticated defenders of government funding of education and health care will point to public goods that are not about feelings: the supposed stabilizing effect of an educated citizenry, herd immunity from communicable diseases. Or they will claim positive externalities that can't be internalized without state funding-- not quite the same as a public goods argument but not far from it either.

AS writes:

Roads and other basic infrastructure you could make an argument for making public goods, because their consumption is non-rivalrous up to a point. But how did education and health care became public goods? These are, by all definitions, pure private goods. They are completely rivalrous and completely excludable.

Glenn writes:

AS is correct. There is no (economic) argument under which one can even approximately approach the conclusion that education or healthcare are "public goods". Even if we take it as true that there are external benefits to their production not captured by the transactions parties, it does not follow that they are "public goods" in economic meaning.

It only follows that they can be underprovided in conventional markets from a social optimal perspective.

Confusion of these points might seem trivial, but it is not.

Glenn - I don't think you're right. Public good essentially means positive externality that will be underproduced. The uncompensated part of the actions in question are the public good. So for education, living in a more-civilized society is an additional benefit to the private benefits of education, and hence at least *that part* of education could be considered a public good.

What worries *me* more is the assumption that you can't exclude people from the "external" benefits of education. Many of these could be internalized by choice of residence, choice of workplace, and so on.

AS writes:

Even if living in a more-civilized society has indisputable spillover benefits, is crowding out private resources with nationalized schooling really the best way to achieve that goal? In Free to Choose Milton Friedman separates "schooling" from "education." We have much schooling (effort) but little education (results) to show for it. The same might be said of public health care and public charity. The link between spending and results seems weaker among public goods than private goods, because there is no market mechanism to provide the feedback loops necessary to keep spending efficient. Not to even mention the tax wedge.

Daniel Kuehn writes:

Michael -
re: "Public good essentially means positive externality that will be underproduced."

But it actually doesn't mean that which I think is the whole problem Bryan's trying to highlight here.

Jason Sorens writes:

For these reasons, I always use the term "collective good" rather than "public good" when teaching, and stress the non-excludability criterion rather than the non-rivalness one, since the former is what generates the putative market failure. I'm teaching political science students, so it's not critical that they know the ins and outs of technical economic terminology, so long as they know the important concepts.

Malcolm Kirkpatrick writes:

What's the problem?
The chapter on "public goods" or, in some text books, "externalities and public goods" usually precedes or follows another chapter on "market failure", the chapter on "information asymmetries".

Let's ring the changes on "rival" and "excludable"
1. Rival and excludable: Fruit on trees on private land.
2. Rival and non-excludable: unconfined game birds, pelagic fisheries.
3.Non-rival and excludable: encrypted radio signals (music, news, etc.).
4. Non-rival and non-excludable: broadcast radio, outdoor concerts, a nuclear detonation over your city, Aum Shinrikyo's subway sarin attack.

I added those last two to underline that a "public good" (or service) must be a good (or service), and not something that people would expend resources to avoid.

Whether considered separately or together, the terms "public goods" and "(positive) externalities" submit to an analysis of their common features: the "free rider" issue and (related) the incomplete system of title.

(Michael): "What worries *me* more is the assumption that you can't exclude people from the 'external' benefits of education. Many of these could be internalized by choice of residence, choice of workplace, and so on."

Advocates for tax subsidization of school typically --assume-- the that "education" (usually undefined beyond "attendance at school") yields benefits for which producers (i.e., students and school personnel) who lack the means of coercion cannot effectively bill recipients. I say grant them that possibility. The case for tax subsidization of school still contains major holes.

Similarly, charity is a "public good" if you grant that most of us benefit when someone provides a homeless bum with a hot meal and a bed. It does not follow that most of us will benefit from a State role in the charity industry.

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