Home > Economics > Public Goods and the Presumption of Markets

Public Goods and the Presumption of Markets

A widely held view in economics is that public goods must be provided by government. In other words, a sufficient condition for government intervention is that a good possesses the characteristics of nonrivalry and nonexcludability. If a good qualifies as “public,” there is a presumption that government intervention is justified.

I claim that this view is misguided. Specifically, I think there should be a presumption of market provision of public goods. Rather than automatically assuming that “publicness” justifies government provision, we should start from the position of market provision of public goods, and place the burden of proof on the advocate of government intervention.

The market is a self-correcting system: inefficiencies on the market create incentives for entrepreneurs to solve them. Of course, the whole point of public goods is that while entrepreneurs have the incentives to find a solution, they are unable to do so: free riders cannot be excluded, and hence it is unprofitable to produce the optimal amount.

This analysis, however, assumes that the ability to exclude nonpayers is a technological given. But in reality this is not true; technology is not fixed, but constantly changing. If it is not presently feasible to exclude free riders, then entrepreneurs will be looking for new exclusion technologies that allow them to capture the gains from trade. Excludability depends on technology; but since technology changes, new exclusion mechanisms can arise, meaning that the publicness of a good is not a fixed factor.

As a result, government provision of public goods will produce a crowding out effect. When government monopolizes the production of a good, entrepreneurs no longer have an incentive to engage in the creative discovery process of developing new exclusion technologies. Government intervention stifles innovation, and goods that could have become private will remain public. Hence the publicness of many goods provided by government is actually the result of their public provision, and not the cause of it. Government intervention becomes a self-fulfilling prophecy: markets cannot solve collective action problems because government crowds out market solutions.

But the most important reason for the presumption of markets is the fallacy of appeal to personal incredulity. This occurs when one reasons from “I cannot imagine how markets could provide this good” to “markets cannot provide this good.” But in fact an economist’s ability to diagnose public goods problems depends on their entrepreneurial ability.

Suppose an economist is also a creative and imaginative entrepreneur. When faced with a potential public goods problem, they will be able to imagine how markets could solve the problem through property or contract mechanisms, and so will reject government intervention as inefficient. But if, on the other hand, the economist is an incompetent entrepreneur, they will call for central planning simply because they personally cannot imagine any property or contractual solutions to the particular problem.

A very good example is James Meade, who argued that the positive externalities associated with honey bees would result in inefficient production of crops and honey. Because of the public goods problem, Meade argued, government intervention was necessary. In the real world, however, contracts between beekeepers and farmers solving this problem were commonplace. Meade’s failure of imagination led him to advocate unnecessary and inefficient government intervention.

Since creativity and imagination are scarce, economists are likely to be biased, as Meade was, in favor of government intervention. They will tend to underestimate the ability of property and contract mechanisms to solve supposed market failures. I submit that, to correct for this statist bias, there should be a presumption of markets. (In similar fashion, Bryan Caplan argues for a presumption of elasticity.) If we take into account the changeable nature of exclusion technology, the crowding out effect of government intervention, and the fallacy of appeal to personal incredulity, we find that the presumption should be in favor of markets, and that proponents of government intervention should bear the burden of proof.

Of course, this presumption is defeasible. Government provision of public goods can be efficient. The point of the presumption is to take into account and correct for interventionist bias. How can the presumption of markets be overcome? At the very least, proponents of government intervention have to do more than merely show that a public good exists. That was Meade’s error. I suggest that economists should: first, look at the real world to see if the problem really exists; and second, actually investigate possible market solutions before proclaiming “market failure!” This is an imperfect solution, but at least it’s a step in the right direction.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: