Thursday, October 6, 2011

Public Goods vs Private Goods

It is, of course, not desirable that anything should be done by funds derived from compulsory taxation, which is already sufficiently well done by individual liberality. - J.S. Mill
Thus, considered in themselves, in their own nature, in their normal state, and apart from all abuses, public services are, like private services, purely and simply acts of exchange. - Bastiat, Private and Public Services
The only difference between public goods and private goods is that people can free-ride off the contributions that others make to public goods.  To fix that problem we simply force people to pay taxes. Once we force people to pay taxes then public goods become in essence no different than private goods.

We've long since established that markets are more effective than planners at efficiently allocating private goods.  For example, some of the countries that still have planned economies are...Cuba, Libya, North Korea, Saudi Arabia, Belarus, and Myanmar.  So if planners fail at allocating private goods...and public goods are not essentially different than private goods...then why do we still allow planners (aka congress) to allocate public goods?

The solution is simply to allow taxpayers to directly allocate their taxes among the various government organizations.  For example, at anytime throughout the year you could visit the Environmental Protection Agency website and directly submit a payment.

This system, also known as tax choice, would allow taxpayers to consider the opportunity costs of their allocation decisions.  The result would be a far more efficient allocation of public funds.

For those not familiar with the economic term..."opportunity cost" refers to how much of one good somebody would be willing to forgo in order to gain more of another good. For example, how much public education would you be willing to sacrifice for a secure border? How much defense would you be willing to sacrifice for improved infrastructure?  Your opportunity cost decisions allow everything you know ("partial knowledge") and value to help determine how society's limited resources are used.

In each of the following quotes I underlined the sections that are relevant to the concept of opportunity cost.
Nevertheless, the classic solution to the problem of underprovision of public goods has been government funding - through compulsory taxation - and government production of the good or service in question. Although this may substantially alleviate the problem of numerous free-riders that refuse to pay for the benefits they receive, it should be noted that the policy process does not provide any very plausible method for determining what the optimal or best level of provision of a public good actually is. When it is impossible to observe what individuals are willing to give up in order to get the public good, how can policymakers access how urgently they really want more or less of it, given the other possible uses of their money? There is a whole economic literature dealing with the willingness-to-pay methods and contingent valuation techniques to try and divine such preference in the absence of a market price doing so, but even the most optimistic proponents of such devices tend to concede that public goods will still most likely be underprovided or overprovided under government stewardship. - Patricia Kennett, Governance, globalization and public policy
The working out of financial arrangements between collective consumption units and production units is one of the most difficult problems faced by entrepreneurs in the public economy. Without market prices and market transactions, the act of paying for a good generally occurs at a time and place far from the act of consuming the good: individual costs are widely separated from individual benefits. Yet a principle of fiscal equivalence--that those receiving the benefits from a service pay the costs for that service--must apply in the public economy just as it applies in a market economy. Costs must be proportioned to benefits if people are to have any sense of economic reality. Otherwise beneficiaries may assume that public goods are free goods, that money in the public treasury is "the government's money," and that no opportunities are foregone in spending that money. When this happens the foundations of a democratic society are threatened. The alternative is to adhere as closely as possible to the principle of fiscal equivalence and to proportion taxes as closely as possible to benefits received. - Vincent Ostrom and Elinor Ostrom, Public Goods and Public Choices (PDF)

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