Public goods and services: Understanding through example
There are some goods and services that markets do not provide efficiently nor in sufficient quantity, that provide enormous benefit to the general population. Those are called public goods and services.*
Consider for example roads. Imagine a community without any tracks or paths, let alone wide lanes or paved roads. Residents and animals of each farm and home can reach another only by pushing through forest, or meadows, or mire, around or over outcroppings.
Initially there would be no market center specialized in trade. There would be no center.
But people and their animals would wear paths to where they most often went. Most of all, of course, to their own fields. But to other farms and houses where they exchanged or socialized, as well.
Each household's paths would have value to its members, of course-- that value is how they got made. But each household's paths have value to other households, which can now reach that first household more easily, in less time.
And consider how a household can wear a shorter path to reach paths worn by others, to go to, say, a mill.
The value of networked paths greatly exceeds the sum of the private values of the paths-- though the private values is what gets them made, in this example. As these pathways interconnected the value of the network of paths would increase-- at least for some time, would multiply rather than merely being added to.
In fact, a path focus or foci would emerge, where many paths insected. Each focus would be a handy place for people to meet, to trade, maybe even to consider becoming a community.
It probably wouldn't take very long for specialists to emerge who would set up stable markets where goods could be securely left rather than transported daily, where the public nature of interactions would limit dishonest practices, where rules of trade might emerge and be monitored by the community gaze, if not yet by justice specialists.
If you have been following my example of community in which individual households/businesses build paths, maybe even roads between premises, and a central marketplace emerges, you may well have thought, YES! who needs government? Individual self-interest will lead to emergence of All the Good Things.
Even though my example purports to demonstrate that there are goods and services that that are inadequately provided in insufficient quantities, by individual actors, whether through markets or not.
So let us consider further.
Remember how I said that when A beats a path to pathways beaten out by others, the value of both A's pathway and the whole network is enhanced?
That is because A may bring goods or service to market that others want to buy-- and because A may come to market and buy others' products, to their advantage. And that's beyond valuing the pleasures of friendship, socialization, help in emergency.
In the example thus far, A has an interest in pathways others have made. And others have an interest in A's hook-up pathway, to everyone in the community who joins the network. EVEN THOSE WHO NEVER PERSONALLY TAKE THE PATH TO A's HOMESTEAD.
But then, two points emerge.
Paths need maintenance. Unmantained, they become overgrown, or perilously rutted, or seasonally impassibly muddy. The householder who makes a path to suit herself may not make one to accommodate the carts or bullocks of others. And it's a rare householder who can afford to pave a path of any length.
A path that limits others' access to A's homestead is worth less in the network. A path that limits A's visits to market is worth less to the network.
Secondly, A may say, "I'm not the only one who benefits from this pathway! I will charge a toll!"
In our example people in a geographic area wear paths that ease travel and transort for themselves and others. And as these paths interconnect the value of the network increases faster than the value of any one path. Community can then emerge, and almost surely would.
But just as one household's path adds to the value of the network to everyone, everyone has an interest in each household's care and maintenance of the path it originated.
Whereas the value of a household's path to that household alone is what motivates their maintenance or improvement of their path. And that is also relative to that household's budget of time, strength, and any other resources used.
With all pathways originated and maintained through individual benefit and resources, the network will be worse-maintained and less extensive than the community would value and, as a community, would be able to fund.
Individual households would maintain their paths beyond their own interests, households would improve each others' pathways, only if they felt generous/magnanimous/heroic.
Should the community depend on whimsical individual generosity? Why?
I hope that it's clear how the existence and maintenance of each pathway is in the interests of the geographic community that a network of pathways fosters. That a path one never personally travels can benefit one by bringing a trade partner, a friend, news.**
Now, suppose a pathmaker who is aware that the path's value to the community exceeds the value of the path to them, and establishes a tollgate. "Look!" they might say, "I can't maintain this path as much as you'd like from my own resources. You like to use my path, so help me pay for it."
The cost of maintaining the path has jut increased substantially, because a tollgate keeper is now needed.***
Even if all previous path-takers continue to use the path, then, the cost of the network has increased, and in the form of directly unproductive activity ****.
But we would also expect to see use of that pathway decline-- reducing the valule of the path-network--, and also directly unproductive activity undertaken to evade the toll, another cost increase.
So we have here at least three characteristics of a public good or service. Their benefits to the community exceed the sum of their individual benefits to community members. It is difficult to exclude community members from enjoyment of the benefits-- remember the value of the path one never personally takes? And it is difficult for a producer of the good or service to recoup from the community the value that the good/service brings to the community.
And so individually-produced goods and services of this sort are likely to be underproduced and ill-maintained.
---
Before I went to England for a week we were working through an example of road-building, to illustrate the concept of public goods and services, which
- have community benefits beyond the sum of individual benefits
- which are hard for investors in the public good or service to receive compensation for
- because it is difficult to exclude community members from those benefits
- and therefore private investors/entrepreneurs tend to produce too little and too low-quality of the inherently public good or service*
I was talking about roads constructed in a community, and mentioned that they can bring bad things as well as good. In fact, by geographically concentrating traffic, including commercial traffic, roadways become a relatively rich hunting grounds for theft.
Beyond the issue of paths and roads made within a village area, consider a roadway between two such pathed communities.
In itself, it lowers transport costs and facilitates trade between two communities, which can thus enjoy mutual gains from trade. (And of course individual entrepeneurs can enjoy greater profit with enhanced markets.)
But as a pathway for people carrying valuables, it is likely to be infested by theft.
So security becomes a concern. Should it be approached by private entrepreneurs?
---
Now suppose bold traders who take goods or services between two communities wear a path or road between two communities. The path that emerges will naturally tend to be one offering the greatest ease of transport. The maintenance and investment problems mentioned earlier in discussing household-generated paths occur but are multiplied by distance and by the greater dispersal of who benefits.
But I wanted to discuss the issue of the theft such a road would generate. A convenient road attracts more and more valuable traffic and becomes a target for banditry.
Each traveler could be responsible for their own security and risk, which would increase the cost of using the road considerably. The well-heeled who could hire guards would be more able to use the road for trade that could increase their wealth, and concentrating trade among a few well-heeled people would allow them to extract most of the gains from trade, and concentrate wealth further.
Such guards would not be hired to protect the person and Property of anyone but their employer, of course, unless the employer was generous. Though the employer could choose to charge to include other travelers under the security umbrella.
And a staff of private security guards also potentially become bravo/as who can rob for their employer. (And publicly employed law enforcement can become a local crime gang as well, of course. And often enough have.)
The two villages could decide****** to appoint or hire a road authority to maintain road security and maybe the material road. If they gave the authority toll rights to finance such action, the same problems with evasion, underuse, benefits being communty-wide and not limited to road-travelers would emerge as in the case of a within-village path.
Greater benefits to both villages could be achieved by specifying the form and amount of maintenance to be performed, and paying the road authority by village taxes.
But of course if one doesn't approve of taxes, those benefits must be foregone.
---
So the example of path-making we've been tracing is an attempt to demonstrate the nature of public goods and services, which
- have public as well as private benefits
- that are hard to exclude people from
- and difficult to charge all beneficiaries for
- with the result that they are underproduced on an individual or market basis
Some other things have emerged from this story.
As with fire or spoons, public goods and services can have or draw adverse effects as well as beneficial ones, and that doesn't mean they should not be produced, or produced on a public basis.
As with meals or clean floors, public goods and services typically require maintenance for good functioning, and that doesn't invalidate them.
It is possible and valid to choose tax-avoidance or individualism as your priority, and reject community provision of public goods and services, but it will lose you a lot of efficiency.
And a whisper of this has appeared in the story of the two communities joined by a road-- the efficiency-appropriate community to produce a public good or service is a non-trivial, subtle matter. In that story, should the communities negotiate as two entities or form a one-community unit at least for production of road services?
If the world is networked with transport paths, the people of Hangzhou, China benefit a tiny bit from Highway 13 between Carbondale and Murphysboro, Illinois. And those Illinoisans from roads connecting Hangzhou with its neighbors and the wider world. But financing and decision-making for those highways is likely best to be separate.
* As with markets/non-markets and money/non-money, there is not a simple boundary between public and private goods and services. Many goods and services have both public and private aspects. This will be embodied in examples. I'm going to give a lot of examples.
** Of course paths can bring undesirable things, too! More on this soon.
*** Remember, the economic concept of cost is not about monetary payment, or payment at all. It is about what else the tollgate keeper could be doing, whether productive (hoeing turnips) or pleasurable (playing mumblety-peg). Staffing a tollgate keeps that agent from doing other things, and is therefore costly.
**** A directly unproductive activity may or may not be worth undertaking, but produces nothing that either gives people pleasure or sustenance, nor contributes to the prodction of things that give pleasure or sustenance.
***** Are you thinking to yourself that this means that a supposed infrastructure project that must show a monetary recovered profit excludes the most useful projects or underproduces them? Right!
****** What does it mean for a village to decide? It means there has to be a polity for the decision to occur, whether the village is in the demesne of a noble, or has representatives who make community decisions, or is a democracy making choices in accordance with some voting rule.
Facebook posts incorporated:
Public goods/services examples: Roads
Further development of a privately generated network of roads
Roads: Maintenance and tolls
Individually motivated investment in infrastructure is insufficient by community standards
Why charging for use of public goods/services is not a solution
Infrastructure as attractive nuisance
Law enforcement, private or public?
Public goods/services summary
Consider for example roads. Imagine a community without any tracks or paths, let alone wide lanes or paved roads. Residents and animals of each farm and home can reach another only by pushing through forest, or meadows, or mire, around or over outcroppings.
Initially there would be no market center specialized in trade. There would be no center.
But people and their animals would wear paths to where they most often went. Most of all, of course, to their own fields. But to other farms and houses where they exchanged or socialized, as well.
Each household's paths would have value to its members, of course-- that value is how they got made. But each household's paths have value to other households, which can now reach that first household more easily, in less time.
And consider how a household can wear a shorter path to reach paths worn by others, to go to, say, a mill.
The value of networked paths greatly exceeds the sum of the private values of the paths-- though the private values is what gets them made, in this example. As these pathways interconnected the value of the network of paths would increase-- at least for some time, would multiply rather than merely being added to.
In fact, a path focus or foci would emerge, where many paths insected. Each focus would be a handy place for people to meet, to trade, maybe even to consider becoming a community.
It probably wouldn't take very long for specialists to emerge who would set up stable markets where goods could be securely left rather than transported daily, where the public nature of interactions would limit dishonest practices, where rules of trade might emerge and be monitored by the community gaze, if not yet by justice specialists.
If you have been following my example of community in which individual households/businesses build paths, maybe even roads between premises, and a central marketplace emerges, you may well have thought, YES! who needs government? Individual self-interest will lead to emergence of All the Good Things.
Even though my example purports to demonstrate that there are goods and services that that are inadequately provided in insufficient quantities, by individual actors, whether through markets or not.
So let us consider further.
Remember how I said that when A beats a path to pathways beaten out by others, the value of both A's pathway and the whole network is enhanced?
That is because A may bring goods or service to market that others want to buy-- and because A may come to market and buy others' products, to their advantage. And that's beyond valuing the pleasures of friendship, socialization, help in emergency.
In the example thus far, A has an interest in pathways others have made. And others have an interest in A's hook-up pathway, to everyone in the community who joins the network. EVEN THOSE WHO NEVER PERSONALLY TAKE THE PATH TO A's HOMESTEAD.
But then, two points emerge.
Paths need maintenance. Unmantained, they become overgrown, or perilously rutted, or seasonally impassibly muddy. The householder who makes a path to suit herself may not make one to accommodate the carts or bullocks of others. And it's a rare householder who can afford to pave a path of any length.
A path that limits others' access to A's homestead is worth less in the network. A path that limits A's visits to market is worth less to the network.
Secondly, A may say, "I'm not the only one who benefits from this pathway! I will charge a toll!"
In our example people in a geographic area wear paths that ease travel and transort for themselves and others. And as these paths interconnect the value of the network increases faster than the value of any one path. Community can then emerge, and almost surely would.
But just as one household's path adds to the value of the network to everyone, everyone has an interest in each household's care and maintenance of the path it originated.
Whereas the value of a household's path to that household alone is what motivates their maintenance or improvement of their path. And that is also relative to that household's budget of time, strength, and any other resources used.
With all pathways originated and maintained through individual benefit and resources, the network will be worse-maintained and less extensive than the community would value and, as a community, would be able to fund.
Individual households would maintain their paths beyond their own interests, households would improve each others' pathways, only if they felt generous/magnanimous/heroic.
Should the community depend on whimsical individual generosity? Why?
I hope that it's clear how the existence and maintenance of each pathway is in the interests of the geographic community that a network of pathways fosters. That a path one never personally travels can benefit one by bringing a trade partner, a friend, news.**
Now, suppose a pathmaker who is aware that the path's value to the community exceeds the value of the path to them, and establishes a tollgate. "Look!" they might say, "I can't maintain this path as much as you'd like from my own resources. You like to use my path, so help me pay for it."
The cost of maintaining the path has jut increased substantially, because a tollgate keeper is now needed.***
Even if all previous path-takers continue to use the path, then, the cost of the network has increased, and in the form of directly unproductive activity ****.
But we would also expect to see use of that pathway decline-- reducing the valule of the path-network--, and also directly unproductive activity undertaken to evade the toll, another cost increase.
So we have here at least three characteristics of a public good or service. Their benefits to the community exceed the sum of their individual benefits to community members. It is difficult to exclude community members from enjoyment of the benefits-- remember the value of the path one never personally takes? And it is difficult for a producer of the good or service to recoup from the community the value that the good/service brings to the community.
And so individually-produced goods and services of this sort are likely to be underproduced and ill-maintained.
---
Before I went to England for a week we were working through an example of road-building, to illustrate the concept of public goods and services, which
- have community benefits beyond the sum of individual benefits
- which are hard for investors in the public good or service to receive compensation for
- because it is difficult to exclude community members from those benefits
- and therefore private investors/entrepreneurs tend to produce too little and too low-quality of the inherently public good or service*
I was talking about roads constructed in a community, and mentioned that they can bring bad things as well as good. In fact, by geographically concentrating traffic, including commercial traffic, roadways become a relatively rich hunting grounds for theft.
Beyond the issue of paths and roads made within a village area, consider a roadway between two such pathed communities.
In itself, it lowers transport costs and facilitates trade between two communities, which can thus enjoy mutual gains from trade. (And of course individual entrepeneurs can enjoy greater profit with enhanced markets.)
But as a pathway for people carrying valuables, it is likely to be infested by theft.
So security becomes a concern. Should it be approached by private entrepreneurs?
---
Now suppose bold traders who take goods or services between two communities wear a path or road between two communities. The path that emerges will naturally tend to be one offering the greatest ease of transport. The maintenance and investment problems mentioned earlier in discussing household-generated paths occur but are multiplied by distance and by the greater dispersal of who benefits.
But I wanted to discuss the issue of the theft such a road would generate. A convenient road attracts more and more valuable traffic and becomes a target for banditry.
Each traveler could be responsible for their own security and risk, which would increase the cost of using the road considerably. The well-heeled who could hire guards would be more able to use the road for trade that could increase their wealth, and concentrating trade among a few well-heeled people would allow them to extract most of the gains from trade, and concentrate wealth further.
Such guards would not be hired to protect the person and Property of anyone but their employer, of course, unless the employer was generous. Though the employer could choose to charge to include other travelers under the security umbrella.
And a staff of private security guards also potentially become bravo/as who can rob for their employer. (And publicly employed law enforcement can become a local crime gang as well, of course. And often enough have.)
The two villages could decide****** to appoint or hire a road authority to maintain road security and maybe the material road. If they gave the authority toll rights to finance such action, the same problems with evasion, underuse, benefits being communty-wide and not limited to road-travelers would emerge as in the case of a within-village path.
Greater benefits to both villages could be achieved by specifying the form and amount of maintenance to be performed, and paying the road authority by village taxes.
But of course if one doesn't approve of taxes, those benefits must be foregone.
---
So the example of path-making we've been tracing is an attempt to demonstrate the nature of public goods and services, which
- have public as well as private benefits
- that are hard to exclude people from
- and difficult to charge all beneficiaries for
- with the result that they are underproduced on an individual or market basis
Some other things have emerged from this story.
As with fire or spoons, public goods and services can have or draw adverse effects as well as beneficial ones, and that doesn't mean they should not be produced, or produced on a public basis.
As with meals or clean floors, public goods and services typically require maintenance for good functioning, and that doesn't invalidate them.
It is possible and valid to choose tax-avoidance or individualism as your priority, and reject community provision of public goods and services, but it will lose you a lot of efficiency.
And a whisper of this has appeared in the story of the two communities joined by a road-- the efficiency-appropriate community to produce a public good or service is a non-trivial, subtle matter. In that story, should the communities negotiate as two entities or form a one-community unit at least for production of road services?
If the world is networked with transport paths, the people of Hangzhou, China benefit a tiny bit from Highway 13 between Carbondale and Murphysboro, Illinois. And those Illinoisans from roads connecting Hangzhou with its neighbors and the wider world. But financing and decision-making for those highways is likely best to be separate.
* As with markets/non-markets and money/non-money, there is not a simple boundary between public and private goods and services. Many goods and services have both public and private aspects. This will be embodied in examples. I'm going to give a lot of examples.
** Of course paths can bring undesirable things, too! More on this soon.
*** Remember, the economic concept of cost is not about monetary payment, or payment at all. It is about what else the tollgate keeper could be doing, whether productive (hoeing turnips) or pleasurable (playing mumblety-peg). Staffing a tollgate keeps that agent from doing other things, and is therefore costly.
**** A directly unproductive activity may or may not be worth undertaking, but produces nothing that either gives people pleasure or sustenance, nor contributes to the prodction of things that give pleasure or sustenance.
***** Are you thinking to yourself that this means that a supposed infrastructure project that must show a monetary recovered profit excludes the most useful projects or underproduces them? Right!
****** What does it mean for a village to decide? It means there has to be a polity for the decision to occur, whether the village is in the demesne of a noble, or has representatives who make community decisions, or is a democracy making choices in accordance with some voting rule.
Facebook posts incorporated:
Public goods/services examples: Roads
Further development of a privately generated network of roads
Roads: Maintenance and tolls
Individually motivated investment in infrastructure is insufficient by community standards
Why charging for use of public goods/services is not a solution
Infrastructure as attractive nuisance
Law enforcement, private or public?
Public goods/services summary