Monday, January 27, 2014

The Actual Demand For Public Goods

Reply to: Public vs Private System of Representation

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Henry Rogue, the bottom line is that we don't know what the actual demand for public goods truly is. This is the problem with the current system. It's a problem that we don't know what the actual demand for salted roads truly is...and it's an even bigger problem that we don't know what the actual demand for war truly is.

Let's imagine a scenario where there are only two public goods...salted roads and defense. The question is, and always is, how should society's limited resources be divided between these two uses? The more resources we direct to one use...the less resources we will have for the other. Any additional person that we employ to salt the roads...is one less person that we'll be able to employ to defend the US against an attack from Canada. If we employ our brightest minds to determine how to prevent tires from slipping...we won't be able to employ our brightest minds to determine how to prevent Canada from attacking. What is the optimal balance? How should society's limited resources be divided between these two possible uses? We're dealing with a utility maximization problem.

Given the fact that people have different preferences, circumstances and partial knowledge...we would create the most value by allowing each and every taxpayer to choose how much of one public good they'll sacrifice for more of the other. How much defense against Canada is each and every taxpayer willing to forego for more salted roads? This is the opportunity cost concept. The freedom to evaluate the alternative uses of our limited resources is what helps ensure that they are put to the most valuable uses (efficient allocation). The efficient allocation of resources is the use/distribution of resources which provides the total maximum utility.

It's basically an equation. There's input...and there's output. When you can shop for yourself...when you decide how much of each public good you put into your shopping cart...your choices reflect your preferences, circumstances, priorities, interests, concerns, partial knowledge...all this is the input. The greater the variety of input...the more people that are allowed to shop for themselves...the more valuable the output. The more accurately that the supply of public goods matches the true preferences of citizens...the more value that is created. The greater the disparity between what is supplied and what is actually demanded...the more value that is destroyed.

Once we create a market in the public sector...then we'll learn what the actual demand for salted roads truly is. The more money that people spend on salted roads...the less money they'll have to spend on public education, sewage treatment, the post office, the DMV, roads, bridges, street lighting, foodstamps, public healthcare, public education, pubic museums, public botanical gardens, police, firemen and so on. Again, this is the opportunity cost concept. This is how we will determine what the actual demand for public goods truly is.

So wondering whether there will be a shortage of salt is a purely academic exercise...given that we have no idea what the actual demand for salted roads truly is. Maybe when confronted with the alternative uses of their limited taxes people will decide that there are far more important things that they can spend their taxes on. Maybe they will decide that they'd rather risk injury from slippery roads than risk injury from invading Canadians. Maybe the actual demand for salted roads will be so high...that many entrepreneurs will be incentivized to create tires that don't slip. If they did so, then this would free up society's limited resources for more valuable uses.

The point is, resources can't be used to create the most value when we don't know what people value most. This is why it's imperative that we allow people to shop for themselves in the public sector. Tax choice will reveal what the actual demand for public goods truly is.

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