David R. Henderson  

Studies of Public Goods

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In a comment on a recent post of mine about government spending on infrastructure, Ben H. wrote:

This seems to ignore the problem of public goods. It is, arguably, pretty easy to identify public goods for which spending $1 increases total welfare across the population by more than $1, but which no individual person has an incentive to spend their own $1 upon.

I didn't think it was easy at all. I know that the theoretical argument for public goods is easy to make and I make it in every class I teach. But I've found that it's much harder to identify specific public goods on which we can be quite confident that $1 of spending creates substantially more than $1 of benefits. I say "substantially more" because we need also to take account of the deadweight losses from the taxes to pay for those public goods, and the deadweight losses from those taxes tend to be 30% or more of the revenue raised.

Because I didn't think it was easy to identify such cases, I challenged Ben H. to give cites. He replied:

To those demanding citations of specific papers, etc.: sorry, I'm not an expert in public goods theory and I'm not going to try to pretend that I am. It's a vast, vast literature, and Google Scholar can provide you with thousands of citations in less than a second. If you want more curated cites to particular studies that are particularly rigorous and convincing, I'm sure there are lots of public goods theorists out there who you could ask, and who would happily provide you with their opinion on that. If you honestly want to know - if demanding cites is not just a rhetorical tactic intended to shut me up - then I suggest you pursue that avenue.

He's right that the literature on public goods theory is vast. But his original claim was not about public goods theory--it was that it's easy to identify cases where government can create value substantially above cost. That's public goods empirics.

By the way, recall also that my original post was not about public goods per se. It was about infrastructure. With much infrastructure, though not all, it is technologically relative low-cost to exclude non-payers, which means that the infrastructure fails to satisfy one of the two criteria that Paul Samuelson laid down in the early 1950s for a public good.


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CATEGORIES: Public Goods




COMMENTS (23 to date)
ThaomasH writes:

I partially agree on both counts. Much infrastructure is not necessarily a public good and indeed it would be much more efficient if some of it were properly priced. I'm thinking urban streets and irrigation infrastructure. But priced or not, if you think that up until now many projects passing the NPV test have not been executed, it might pay to start executing some of them even in the middle of a small negative supply shock.

And of course it is not "easy" to decide on worthwhile public goods. The ones that look obvious to me may not to thee. On the other hand I'm not sure the dead weight loss from taxes need be very large if we had a progressive consumption tax. Compared to the uncertainty about the value of the public good itself, (that asteroid strike prevention investment) the dead-weight loss is probably negligible.

bill writes:

The contribution to global warming is another negative that all infrastructure projects (at least the transportation related ones) need to overcome. At least until we have a significant carbon tax (ie, a carbon tax that results in an 80% or greater reduction in US carbon emissions).

Ben H. writes:

Hi. Thanks for taking my comments seriously enough to do a follow-up post. If all you want is examples of public goods that seem worth spending money on, I would say again that they don't seem to me to be particularly hard to find. Take public health, for example – the work of the CDC in studying and controlling diseases doesn't cost much and saves lots of lives. Traffic lights, as I mentioned in my second comment on your previous post; they save everybody lots of time, and probably prevent lots of accidents, at very little cost compared to the benefit they provide. Pollution controls (i.e., clean air and water); we all benefit from environmental regulations enormously in terms of health, lifespan, and quality of life, and I'd be pretty skeptical of anybody who says they would gladly live in Beijing-level air pollution (or what used to be Los Angeles-level air pollution) just to save a little money on their electricity bill. These are not hard examples to think of. Maybe you will now proceed to shoot holes in all of them somehow, but they seem pretty obvious to me. I'm glad the government provides these things, their cost seems pretty negligible compared to their benefits, and I have a hard time picturing any realistic scheme in which they would be provided by the free market instead because of the tragedy of the commons and the free-rider problem. In many ways I do think libertarianism has the right end of the stick; but it is quite possible to take it too far. Moderation in all things. Government has its uses.

And again, I won't provide cites for these examples, since as I said I am not an expert in this field and I have no idea what I might cite in support of my claims. I guess I'm still feeling like these claims are so blindingly obvious that academic citations should not be necessary – do you really doubt that the benefit of traffic lights is greater than their cost?? would you really be happy to see all the traffic lights in your city taken out, in order to save however many cents would be taken off your tax bill?? – but I will be happy to be proved wrong, if wrong I am.

David R. Henderson writes:

Remember, Ben H., that we’re talking about additional dollars spent, not current dollars spent. And no, the CDC thing is not at all blindingly obvious. The traffic lights probably are, but it’s not clear that the next traffic lights will be.

Stephen Jones writes:

I have 1! Fireworks. I'm quite sure fireworks generate more than 1$ in welfare for each dollar spent and an additional dollar is likely to add something like a dollar (or more) in aggregate welfare. The massive transactions costs of getting to the fireworks show per person on say 4th of July indicates a revealed preference that it is at least plausible that the benefits are there. For example, the Washington, D.C. 4th of July show cost just over $220k last year. Over $700k people watched the show in DC which amounts to a little over 30cents per person. once you consider the hours most people send parking, trying to find the right spot, etc. it seems reasonable that the marginal dollar generated more than say 1.3$ in value.

One wrinkle is many 4th of July fireworks are funded via private donations to the government and NOT general tax revenues or are provided by private clubs. In fact, in small towns fireworks might be funded by one wealthy guy who has historically paid for them or by the Rotary that turns it into an event. [Neither was not the case in DC so far as I know]. Individuals and clubs are often sufficient to provide public goods, as Buchanan long ago pointed out, because individuals may have extreme preferences and clubs may have incentive to capture some of the gains. Thus even in theory it isn't convincing.

ThomasH writes:

I'd suggest that the "next traffic light" would be a system of vehicle monitoring that would make it possible to charge for use of urban streets and roads -- real time congestion and parking -- combined with smarter traffic signals that only stop traffic in one direction when there is a competing demand for the intersection.

Jonathan Monroe writes:
With much infrastructure, though not all, it is technologically relative low-cost to exclude non-payers

For roads, which is what Americans are typically thinking of when they say infrastructure, it isn't "relatively low-cost" to exclude non-payers. For example, the London congestion charge (a deliberately simple scheme) spends £80 million out of £260 million raised on costs of collection, and this doesn't count the administrative costs to people paying the charge. I believe EZ-pass is cheaper to operate, but most libertarians object to EZ-pass as the default way of collecting tolls because of the Panopticon issue. Another example is that France doesn't collect motorway tolls in the Paris suburbs because the costs of collection (including the cost to drivers stuck in toll queues) would exceed the amount collected.

AS writes:

That's because the roads are owned by the state so implementing efficient technological solutions is difficult with zero competition. If the roads were privatized, the optimal congestion pricing mechanism would emerge spontaneously, and it may look completely different from what governments have done. For example, car insurance companies install a GPS device in your car's onboard computer that tracks all activity frictionlessly. This technology could easily be used by private road companies who would likely work closely with insurance companies and share data. Now insurance companies have better data on reckless drivers and can properly penalize them, and uninsured drivers would become nonexistent.

RPLong writes:

Stephen Jones offers a pretty good example, depending on how we look at it.

If the question is, subject to an existing fireworks show, should we spend marginal dollars on additional fireworks, I think his case holds up pretty well.

If the question is whether we should organize another day of fireworks, another whole additional fireworks show at a different location, etc., then the case gets a little muddier.

But I'm impressed that he came up with such a good example. This is why I like reading EconLog comments.

Ben H. writes:

David R. Henderson writes: "Remember, Ben H., that we’re talking about additional dollars spent, not current dollars spent." In your original post you were talking about that, yes, and I agree that the problem of finding worthwhile spending is of course more difficult on the margin (if you concede that already existing government spending has identified worthwhile public goods to spend money on – a point that you and others here seem unwilling to concede, in fact). But that is not what we're talking about now, because you have broadened the topic to the question of whether public goods exist at all. As you wrote in this post, "But I've found that it's much harder to identify specific public goods on which we can be quite confident that $1 of spending creates substantially more than $1 of benefits." You don't say anything about the margin in that claim. I have identified several such public goods, and it sounds like in the case of traffic lights, at least, you have conceded the point.

"And no, the CDC thing is not at all blindingly obvious." Hmm. Well, I don't know enough about exactly what responsibilities the CDC has, versus the WHO and other public health organizations, to be able to specifically defend the CDC. But my point, as I wrote, was that public health spending more generally is a public good; the CDC was just an example. So let's talk about public health more generally. What has it achieved? The elimination of smallpox, the near-elimination of polio, the control of the recent Ebola outbreak, the control of diseases like malaria and SARS and West Nile, and on and on. Would you really trade all of the lives that have been saved, and all of the years of additional high-quality lifespan that have been granted, by such work, in return for whatever tiny fraction of your overall taxes have gone to such efforts? I sure wouldn't. Some of these public health efforts have been funded by private money (Rockefeller, Gates, etc.), but a great deal of it has been funded by taxpayer money. And in any case, if we can agree that it was money well-spent – that $1 of spending produced gains worth more than $1 – then it is not important to the question at hand whether it was spent by the government or private foundations; in either case, it is a public good.

Demosthenes writes:

It's sort of immaterial, but the "two conditions" don't come from Samuelson. They come from Musgrave.

Jesse C writes:

If you can take $1 from me and generate $2 value for others, it still might be wrong to do so. I think that is overlooked by people who want more public spending. I get little from government now, and I certainly don't want to be compelled to buy more of what I'm not getting.

Considering the fireworks example, it would be better to charge admission of $0.30 than to use tax dollars paid by someone who chose not to attend. I think public goods need to overcome consideration of private alternatives as well as other hurdles. I'm fine with public spending on traffic lights, BTW. But I'll be glad when ThomasH's suggestion comes to pass (pay-per-use tolls).

Zeke5123 writes:

I'll try to dig the study up, but apparently traffic lights increase deadly accidents contrary to popular belief.

EdP writes:

David writes "I didn't think it was easy at all. I know that the theoretical argument for public goods is easy to make and I make it in every class I teach. But I've found that it's much harder to identify specific public goods on which we can be quite confident that $1 of spending creates substantially more than $1 of benefits. I say "substantially more" because we need also to take account of the deadweight losses from the taxes to pay for those public goods, and the deadweight losses from those taxes tend to be 30% or more of the revenue raised."

I agree, but I think there's an even more important aspect that is often neglected or under-appreciated in appraising whether the provision of a public good would increase welfare.

I think it's safe to say that nearly every activity involves some type of externality. Moreover, whenever certain types of economic activity are encouraged or discouraged (or a good provisioned by the state) over others (for reasons involving external effects), there are innumerable and unpredictable general equilibrium effects. This should make anyone hesitant to be very certain that welfare would increase, even in cases where it often seems obvious. Pollution is often mentioned, for example. It is not obvious to me at all that the reduction in welfare associated with the general equilibrium effects following such a change (taking into account the externalities of all of those effects) would be less than the welfare increase from less pollution.

AJ writes:
So let's talk about public health more generally. What has it achieved? The elimination of smallpox, the near-elimination of polio, the control of the recent Ebola outbreak, the control of diseases like malaria and SARS and West Nile, and on and on. Would you really trade all of the lives that have been saved, and all of the years of additional high-quality lifespan that have been granted, by such work, in return for whatever tiny fraction of your overall taxes have gone to such efforts?

This is making interpersonal utility comparisons, which are impossible to know. There exists no objective single scale of economic ends that can be aggregated into social benefit and cost curves that allow us to make claims of efficient government spending on public goods.

Truth is, we don't know. And, unless you're Paul Krugman or a benevolent and omnipotent politician, we will never know. But we do know that public choice incentives and knowledge problems cut against the widely-held belief that government can spend money more wisely than it can be spent by the individuals from whom that money was confiscated.

I'd rather trust the discovery of life-saving technology that you mention to the wit, intelligence, and entrepreneurial spirit of individuals pursuing their own self-interest over politicians that, as Thomas Sowell says, "pay no price for being wrong".

Ben H. writes:

"This is making interpersonal utility comparisons, which are impossible to know." Ah, that old chestnut. The problem is, it is not exactly true, I think. It would be better to say "This is making interpersonal utility comparisons, which are impossible to know precisely." If I proposed that malaria could be cured worldwide for $100, any rational person would say "wow, that's a great deal; all the alleviated suffering is clearly worth more than $100!" If I proposed that malaria could be cured worldwide for $100 quadrillion, any rational person would say "malaria is a terrible scourge on humanity, but $100 quadrillion... I'm pretty sure we can find a better use for that much money." And then there is a gray area in between. Once you come to grips with that reality, your argument pretty much melts away, because the fact of the matter is that the countless lives that have been saved (and otherwise immensely improved) by public health over the past century have been a fantastic deal considering how little we had to spend to achieve that outcome – and it is possible to be pretty sure of that.

Cole writes:

I've always liked the example of asteroid defense as a public good, but I don't know if I've ever seen anyone do the math on it.

So I'm going to attempt some rough calculations right now:

Cost of asteroid strikes =
(Asteroid strike damage * Chance of striking the earth in an area that will cause damage)
* Chance of being hit by an asteroid

I ran some numbers using wikipedias' likelihood of impact and megaton impact values: https://en.wikipedia.org/wiki/Impact_event

3% of the world's surface is covered by urban areas, but for larger asteroid strikes I assumed that the asteroid landing anywhere would cause damage.

I assumed a cost of 2 billion dollars per megaton of damage in an urban area. This made some intuitive sense as the damage value for the largest impact size (47000 megatons) was the entirety of world GDP, and an asteroid that size would be civilization ending.

I came to a total cost of $500m a year for large asteroid strikes.

Nasa was given $36 million to find 90% of the Near Earth asteroids in the size categories that I looked at. They estimate they have found 10% of those asteroids, and most of the larger ones. This was a pretty good investment. I think they could have safely 10xed that investment and it still would have been worth it.

AJ writes:
It would be better to say "This is making interpersonal utility comparisons, which are impossible to know precisely."

I disagree. As David Friedman says, "Economists are often accused of believing that everything – health, happiness, life itself – can be measured in money. What we actually believe is even odder. We believe that everything can be measured in anything." I don't purport to know peoples' subjective ends, measure them, and compare them. You shouldn't, either.

because the fact of the matter is that the countless lives that have been saved (and otherwise immensely improved) by public health over the past century have been a fantastic deal considering how little we had to spend to achieve that outcome – and it is possible to be pretty sure of that.

I think everyone can agree that the life-saving technologies discovered are desirable economic ends. No doubt about it. Where I disagree with you is the means by which those ends are achieved. I simply don't believe that government has appropriate incentives, knowledge, and feedback mechanisms to know if its spending is creating value and creating a "fantastic" deal.

David R. Henderson writes:

@Ben H,
There’s an even better answer to AJ than the one you gave. I was certainly NOT making interpersonal utility comparisons. I was talking about $ of cost versus $ of value. Value is not the same as utility. Value is measured by willingness to pay. Now it’s true that you have to make ethical judgments to justify forcibly taking from A, B, C, through ZZZZZZZ to help a large subgroup of A, B, C, through ZZZZZZZZ. But that’s a different issue from the value issue.

AJ writes:
I was talking about $ of cost versus $ of value.

Cost is the expected utility perceived to be sacrificed at the moment of choice. Utility generated from buying a particular good is the subjective value assigned to the most highly ranked end to which the good can be devoted. Public spending implies taxation, so talking about government spending on public goods certainly does make claims on utility comparisons - especially claims such as a "fantastic deal".

Also, as I've said before, value is subjective and we simply don't have the ability to know if government spending of $1 creates value greater than $1 for everyone else.

David R. Henderson writes:

@AJ,
Value is subjective, but that doesn’t mean you can’t measure and put bounds on it. If you observe me buying a shirt for $20, you can conclude that at the time of purchase, I value that shirt at at least $20.

AJ writes:
Value is subjective, but that doesn’t mean you can’t measure and put bounds on it. If you observe me buying a shirt for $20, you can conclude that at the time of purchase, I value that shirt at at least $20.

On an individual basis at a particular point in time, yes, I agree with you for a lower bound. But what about an upper bound? Sure, we could ask what's the maximum price you are willing to pay for X, but what incentive does that individual have to convey that price? And what about aggregating those bounds for everyone to determine if overall value is being created by government spending? And with changing subjective ordinal value scales over time?

That's why I'm uncertain as to whether government spending creates wealth and value. We just don't know. And that's assuming away public choice problems. This is purely from an informational/feedback mechanism standpoint. There's no profit/loss accounting in government spending, so there's no way to measure if their spending is improving peoples' lives.

Seth Green writes:

Potential candidate: investment into cheap monitoring for "blocking the box" infractions in NYC. Right now, the externality imposed by drivers who do so is usually borne by people behind them in traffic, and the situation is a total prisoner's dilemma (regardless of what other drivers do, it always makes sense to go for it). De jure, it's a fine and 2 points on your license, but enforcement is weak because two things about blocking the box -- it slows traffic, making it hard for the police to get to the site of the infraction, and it generally lasts for ~ a minute -- make it hard to penalize.

If the police department were creative, they could place like 10 GoPro cameras at 10 high-traffic midtown intersections and just record for a whole day how many people block the box. Then the next day, you pick 10 new intersections and put the cameras there, and so on. Best would be to pick 1000 intersections where it was a problem and randomly assign 10 of them every day so people couldn't predict where they were going to be placed.

The monitoring makes me a big queasy, but I'd trade this for some unnecessary monitoring in another situation and call it a net benefit.

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