Reflections from Europe

The Failure of Market Failure: Part II. The

Public Goods Dilemma
Anthony de Jasay*

November
Part I | Part II

Anthony de Jasay

6,

2006

This is the second of a two-part series. Part I is available at

The Failure of Market Failure, Part I. The Problem of
Contract Enforcement
Public goods are freely accessible to all members of a given public,
each being able to benefit from it without paying for it. The reason
standard theory puts forward for this anomaly is that public goods
are by their technical character non-excludable. There is no way to
exclude a person from access to such a good if it is produced at all.
Examples cited include the defence of the realm, the rule of law,
clean air or traffic control. If all can have it without contributing to
its cost, nobody will contribute and the good will not be produced.
This, in a nutshell, is the public goods dilemma, a form of market
failure which requires taxation to overcome it. Its solution lies
outside the economic calculus; it belongs to politics.

1. Exclusion Cost
Access to a private good is controlled by its producer or owner by a
variety of devices ranging from shop counters, safes, walls and
fences to measures against theft, robbery, fraud, illicit copying and
breach of contract. The cost of these devices and measures is the
exclusion cost of the good. Every good is private or public
according to whether exclusion cost is or is not incurred in making
it available. A public good is distributed freely to all comers from a
given public, avoiding the exclusion cost that would keep it private.
This saving is the 'productivity of publicness'.
Given sufficient imagination and clever technology, every good can
be excluded at some cost. Arguably, some would be very awkward
to exclude, but none is intrinsically 'non-excludable', i.e. doomed to
be a public good. By the same token, every good, whether private
or public, has many more or less imperfect substitutes that may also
be private or public. Thus, contrary to received theory, a more
general view tells us that while no good is intrinsically public, the
higher is its exclusion cost and the more imperfect are its

substitutes, the more efficient it is to provide it publicly.

2. Social Preference for Non-Exclusion

There is one type of exclusion cost that is more important by far
than all the rest in putting a good in the public category: it is social
preference. It is intangible and is only revealed by the choices it
inspires. A pure example is a children's playground. Access to it is
excludable at low cost by a fence and a ticket collector at the gate.
However, society would suffer deep moral embarrassment if rich
children could use the playground but poor ones could only watch
them from the outside. Therefore real exclusion cost would be
unbearably high, and children's playgrounds are provided as public
goods.
There are other, less pure but quantitatively far more important
examples. One is free universal education Most countries provide it
to age 16, some to university degree level. In this case, technicallogistical exclusion cost would be quite low (indeed, in a broad
sense negative as exclusion would permit student selection, and that
would in turn lower production cost), but social ethics would not
tolerate the exclusion of poor, dumb and sub-scholarship standard
pupils. With education becoming a public good affording free
access, the share of public goods in the national product expands
vastly. Organising health care in the form of a free-access public
good on the pattern of the British National Health Service expands
the domain of public goods even further and multiplies the gravity
of the public goods dilemma.
However, it is perverse to argue that this is a true case of market
failure. The dilemma presents itself, not because the market cannot
cope, but because society does not choose to entrust the matter to it.
It may have quite worthy moral reasons for doing so. But it must
not be overlooked that since public goods can be consumed at zero
marginal cost, a tendency is created to their chronic
overconsumption. This, in turn, involves an encroachment of the
public upon the private sector and a cascade of adverse indirect
consequences.

3. Free Rider Or Sucker

Received 'market failure' theory has a false perspective not only in
characterising some goods as intrinsically public rather than made
public by social choice reacting to intangible exclusion costs. It also
mistakes the public goods dilemma for a version of the prisoners'
dilemma. It then finds that like the prisoners' dilemma, the public
goods dilemma has only a non-cooperative equilibrium solution.

Individuals, unless forced to pay taxes, have two choices with

regard to a public good: to contribute or not to contribute to its cost
while enjoying its benefit. The non-contributor gets a free ride, the
contributor is a sucker. For the standard theory, the conclusion is
easy: there will be few or no contributors. The market will fail to
produce the public good, particularly if it is indivisible or 'lumpy',
so that a minimum number of contributors is needed to produce
even a single 'lump' of it (e.g. if the public good 'education' comes
in 'lumps' no smaller in size than a schoolhouse and teacher)
Consider, however, the would-be free rider who must weigh the
attraction of a free ride against the risk that by withholding his
contribution, he will cause the total of contributions to fall short of
the minimum outlay needed to render the good really 'public' freely
accessible to all and satisfying the accepted criterion of publicness,
namely 'non-rivalry in consumption'. This criterion means that
consumption of it by one person does not reduce the amount
available to any other person.
Consider likewise the hesitant sucker who must weigh the
opportunity cost of contributing against the chance that his
contribution will be the one needed to raise total contributions over
the threshold of the minimum required for the 'lump' of public good
needed to permit access to it by the marginal consumer.
In the face of these two pairs of possible outcomes, neither is the
free rider strategy unquestionably the best, nor the sucker strategy
unquestionably the worst. Which of the two is the rational choice
depends on the subjective probability each potential contributor
attaches to others going for the free rider or the sucker choice, as
well as the value he attaches to having the public good instead of
resorting to private substitutes.
The critical values of these variables depend on a complicated set
of factors that cannot be detailed in a brief essay. However, it is
intuitively fairly clear that there is nothing foredoomed about public
goods in general. Whether a good can be 'made public' by voluntary
contributions depends on how rational calculation and anticipation
of the behaviour of others leads to a division within a group
between free riders and suckers. Each of the two possible social
roles, the free rider and the sucker, leads to a pair of uncertain
alternatives. For the free rider they are the free ride (the best) or
failure of the public good (the worst). For the sucker, it is that he
contributes like everyone else (the second-best) or that he
contributes when some others do not (the third-best). In the
standard theories of market failure, the free rider strategy is
'dominant'it is always the best whatever anyone else may do. In
effect, however, the pair 'best or worst' is intrinsically neither
superior nor inferior to the pair 'second-best or third-best'.
Rationally, one pair is chosen depending on the probability that one
member of the pair rather than the other member will in fact turn
out to be the case. The problem becomes simply a case in the theory

of risky choices.
Public goods can thus be brought back under the calculus that
guides homo oeconomicus. The provision of public goods does not
presuppose collective choice that overrules individual ones by the
brute force of politics. Those who instinctively mistrust collective
choices and trust that reasonable solutions emerge from free
individual choices need not feel browbeaten by the 'market failure'
argument.

* Anthony de Jasay is an Anglo-Hungarian economist living in France. He

is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride
(Oxford 1989) and Against Politics (London,1997). His latest book,
Justice and Its Surroundings, was published by Liberty Fund in the
summer of 2002.