06/30/2011 02:46 pm ET Updated Dec 06, 2017

Public Goods: Public By Necessity or Choice?

Rachel Maddow argues, in one of her latest Spike Lee-directed commercials, that some goods and services need to be provided by the government because there isn't a specific profit incentive for private enterprise to provide them:

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What Rachel seems to be describing is what economists call either a public good or a common resource. The notable feature of these types of goods is that their use is not limited to paying customers (i.e. not "excludable", in economic terms). Unless a good that is not restricted to paying customers is attached as a loss leader to some good that is expected to be profitable, producing the good isn't a very good business model for a private enterprise, even if it would be good for society as a whole. This is the economic justification for some goods and services, such as national defense, being provided by the government -- it would be extraordinarily difficult to offer freedom from war and terrorism as a subscription service, but the government can coordinate the funding of such projects via taxes.

Think about it -- if you, as a customer, could sit around and wait for other people to pay for something so that you could use it for free, wouldn't you? The problem is that so would everyone else, companies would realize this, and the socially-beneficial thing would never end up getting produced. Economists call this the free-rider problem. In reality, people are more altruistic than economists generally assume, so they tend to contribute more than zero to public goods (e.g. public television), but usually not enough to achieve the level of production that is best for society.

My internet research tells me that Rachel is at the Hoover Dam, and the shot in question is of one of the newly-constructed bypass road. (In fact, I believe that the structure in question is the Mike O'Callaghan -- Pat Tillman Memorial Bridge.) Whether we're talking about the bridge itself or the dam in general, the same question remains: could access be restricted to paying customers, thereby giving private enterprise an incentive to build such a structure?

Making the bridge excludable would be pretty straightforward -- just install a toll booth. In fact, the Brooklyn Bridge was originally meant to be privately owned, and the Dingmans Bridge, which runs between New Jersey and Pennsylvania, continues to be privately owned and operated. The state of New York is even considering selling off bridges, roads and tunnels, so clearly private ownership is, at the very least, an economic possibility.

As for the dam itself, isn't the main point of the dam to provide power to paying customers? From wikipedia:

Power from the dam's powerhouse was originally sold pursuant to a fifty-year contract which terminated in 1987. When the contracts ended, the Bureau of Reclamation assumed control of the powerplant from the Los Angeles Department of Water and Power and Southern California Edison Co. The contracts were renegotiated and implemented for a 30-year period, and will expire in 2017.

How, then, is the Hoover Dam's output not excludable? It is, in fact, restricted to the 15 paying customers that are included in the contract. Could these organizations not have banded together to finance the building of the dam (and work through the regulatory issues, of course) in the first place?

I get it -- it's hard for companies to coordinate. It's possible that the cost of the dam is still effectively subsidized by the government, despite the fact that it is setting a non-zero price to power recipients. It's also the case that the Hoover Dam was built during the depression, when private enterprise was suffering from lack of credit availability and irrational skittishness about investment. But it's nonetheless a fallacy in general to say "hey, this thing is big, so it has to be provided by the government." If this were the case, wouldn't Google, Wal-Mart, and a whole host of other companies be publicly-owned?

That said, there is a potential argument to be made for the involvement of government in projects such as the Hoover Dam. If the dam provides positive side effects, or externalities, to those not involved in the production or consumption of the dam itself, then it can make sense for the government to subsidize these projects to the degree that they provide these third-party benefits. That said, a subsidy would be more like "hey guys, we're going to throw a few bucks your way to get this thing built so that citizens can benefit from it as well," not "oh here, allow us to fund the building of this thing and take ownership of it when you're done."

The bottom line is that a lot of goods can be either excludable or non-excludable by design, and that decision is somewhat of a value judgment. It's certainly possible to have a private bridge, in which case only those who are willing and able to pay the toll can use it, but there is also an argument to be made that, as a matter of principle rather than of economics, having access to the bridge is a basic right that shouldn't be denied to anyone, in which case the government has to finance the bridge via tax receipts. Therefore, when new government projects are being considered, a number of issues should be discussed:
  1. Do the benefits to society of this projects outweigh the costs?
  2. Could private enterprise provide this good or service if the government did not undertake the project itself?
  3. Is there a compelling reason to ensure that everyone have access to this good or service? If so, is there a way to ensure access without wholly providing the good or service?
Lawmakers, please grant society the goods that it cannot provide for itself, the courage to leave what can and should be provided privately to the private sector, and, most importantly, the wisdom to know the difference.