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Why "Public Goods" Don't Justify Government Intervention

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The theory of public goods is one of the main arguments that is usually employed to justify economically the existence of the state.

There are some dangers in employing neoclassical terminology, as it systematically drives thinking away from sound economics. Nevertheless, for the sake of the argument, let us accept the two defining characteristics of a public good according to mainstream text books.

First, a public good can be consumed by additional consumers without any additional cost. This characteristic is known as nonrivalrous consumption. For instance, once a lighthouse is built, it lights the way for other ships without any additional costs.1

Second, consumers cannot be excluded from consuming the public good once it has been produced at a reasonable cost. For instance, a ship owner who does not want to pay for the services of the lighthouse cannot be excluded from it, because when the lighthouse is turned off no one can see it, not even the ships that paid for it. As a result there emerges the so-called free rider problem: consumers, even though they would like to enjoy the service of the public good, do not help finance it, but try to free ride on the contributions of others. Because anyone will try to free ride on anyone else's contribution, public goods, so the orthodox story goes, would be underproduced in a free market. The government has to step in, tax the free riders, and finance the public good with the tax receipts.

Critiques of the Theory of Public Goods

These claims sound reasonable enough, yet there have been many powerful critiques of the public goods argument:

First, there is no clear and objective dividing line between a private good and a public good. Many public goods are produced privately, such as street music in a pedestrian precinct.2 And many goods produced by the government, such as the postal service, do not fit into the category of public goods. Most importantly, goods have a subjective character. The characterization of a thing as a good is not objective nor eternal. The street musician's song can be considered a public bad if someone detests the performance. As Walter Block has provocatively pointed out, socks may be regarded a public good once people care about the color of the socks that other people wear. Moreover, socklessness could negatively affect health and thereby affect third parties.

Second, rivalry in consumption is also something subjective. When someone prefers to listen to the street musician exclusively, there is rivalry in consumption.

Third, the possibility of exclusion is not objectively given, either. From a dynamic point of view, innovation does bring forward new ways to exclude free riders. For instance, in the case of dikes in northern Germany, entrepreneurs envisioned new business models to exclude nonpayers.

Fourth, it does not follow from the fact that the free market doesn't produce something in the quantity desired by some observer that it should be produced by the state. In order to reach that conclusion one would need to develop an ethical theory first, a norm that would justify violence to produce public goods is normally not provided. In fact, as Hoppe shows in his 1933 "Fallacies of the Public Goods Theory and the Production of Security," such a norm would essentially allow for a war of all against all.

Fifth, state production of public goods implies less production of private goods. State intervention makes economic calculation impossible. The utility that is lost due to the tax financing of public goods can only arbitrarily be compared with the utility gained from their production. Hence, it is as justified to speak of public bads as it is to speak of public goods.

Finally, the amount of public goods production by the state remains arbitrary.

State Intervention Hampers Production of "Public Goods"

There is another point about public goods and free riding that I want to emphasize in this article.

The state often prevents or sabotages the private production of public goods in the market. More specifically, the state makes the solution of the voluntary free rider problem more difficult by taking resources from citizens.

For instance, inflationary monetary policy incentivizes people to indebt themselves more than they would do in a sound money system. When one is overindebted one must focus on monetarily paid work and will do less volunteer work than otherwise.

Taxes work in the same way. The more people are taxed, the less free time they have for voluntary work ceteris paribus. Voluntary work is essential to the private production of public goods such as helping the poor, patrolling on a  neighborhood watch, participating in school meetings, or caring for a beautiful garden. Due to taxation, people also have less resources at their disposal, whose use can also benefit third parties (for example, the installation of lights on one's property that also illuminate the street, or of security devices that deter criminals).

Sometimes government decrees hamper the private production of public goods even more directly. The possession of arms in a population deters criminals and may increase safety. It is possible to free ride in an armed population. Not everyone has to spend money on arms and training. Some can rely on others financing the public good.3 Unfortunately, in many countries the government sabotages the production of this public good through prohibitions.

The Free Rider Problem

A more harmonious society due to voluntary aid, a safer society due to volunteer watchmen, a more beautiful society due to well-kept gardens and illumination—all fit the public good definition. They also show that the free rider problem can be overcome. When there is a market, business models will evolve that provide the services demanded. However, due to taxes, inflationary or not, living standards are lower and less public goods are produced on the free market than would otherwise be.

Social, religious, or political movements provide another answer to the free rider problem. Jeffrey Hummel points out that the American revolutionaries exerted positive externalities on others who could free ride on the actions of the revolutionaries who were risking their lives. Similar free riding occurred during the Crusades. Crusaders risked their lives to ensure Christian pilgrims a safe trip into the Holy Land, while other Christians free rode on these efforts.4 In general, through education and assistance to the poor, religious movements produce public goods such as a more peaceful harmonious and educated society. Everyone can free ride on these efforts.

Similarly, those who contribute to institutions that defend our freedom, such as the Mises Institute, are financing the production of a public good. If you give money to the Mises Institute, you get a freer society than otherwise. Everyone benefits; no one is excluded. In other words, people can free ride on the contributions to the Institute. In spite of this the Mises Institute exists and is thriving. Certainly it could thrive more if taxes were lower and people richer and able to contribute more.5 In this way, government reduces the production of public goods.

Today, protesters against the infringements on liberty due to “stay-a-home” orders are in a similar situation. If there are enough protests against the lockdown and sufficient civil disobedience, the infringements will not be sustainable.6 In this way, the protests can exert positive externalities on the rest of the population.

However, there can also be free riders. Instead of spending time protesting and risking penalties, people can just stay aside (or inside). If all resisted and disobeyed the police, the lockdown would not be enforceable. If, however, too many people free ride, knowingly or not, the public good of liberty will not be achieved. Naturally, the failure to produce the public good of liberty is not a market one, because without the state civil disobedience to achieve liberty would not even be necessary. It is the government that with the threat of the police force suppresses the production of this public good.

In sum, there are public goods that would not be produced without the government, but there are also public goods whose production is made impossible by government. Due to state intervention, there is an overproduction of some public goods and an underproduction of others, such as coronavirus herd immunity.

Which public goods are more important? The ones the government produces or the ones it destroys? Finally, which public goods shall be produced? There are two basic ways to decide. Politicians can arbitrarily decide which public goods are produced and which are not, or individuals voluntarily interacting in a free market can decide which goods are produced.

  • 1. Ronald Coase famously challenged the view that lighthouses are public goods.
  • 2. Note that it is not the objective characteristics of a good that determine its value. Rather, it is the subjectively valued services that a good provides to a consumer that are essential.
  • 3. Take into account that it is completely subjective whether the possession of arms is a public good or a public bad, as some people may feel uncomfortable with the free possession of arms. Criminals would surely consider the widespread possession of arms in the population a public bad.
  • 4. Rodney Stark has defended the crusades as basically defensive endeavors.
  • 5. One could argue that with higher taxes there is a stronger incentive to defend liberty as there is more to gain. However, empirically the US Mises Institute has a higher reach than free market institutes in less free countries with higher tax rates.
  • 6. Étienne de La Boétie has pointed out that state power ultimately rests on consent and obedience.

Contact Philipp Bagus

Philipp Bagus is professor at Universidad Rey Juan Carlos. He is a Fellow of the Mises Institute, an IREF scholar, and the author of numerous books including In Defense of Deflation and The Tragedy of the Euro, and is coauthor of Blind Robbery!, Small States. Big Possibilities.: Small States Are Simply Better!, and Deep Freeze: Iceland's Economic Collapse.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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