Monday, February 23, 2015

The Basics Of Public Finance

Thread posted at The Science Forum... Nature: Supply and Demand


Is nature a public good? In this thread in the biology category... Rapid evolution in cities... Lynx_Fox wasn't so sure that it really is. This topic is more suited for the economics category so figured that I'd post my reply here instead.

My front yard here in Southern California is the only one in my neighborhood that has a tropical dry forest (TDF) instead of a lawn. This is a pretty good clue that I demand more nature than my neighbors do.

However, several of my neighbors have remarked that they really enjoy my TDF. This is a clue that either they were just being polite or that they have some demand for nature. It also indicates that it's very possible that my TDF is a public good. This is because my neighbors can benefit from my TDF without having to chip in to help cover the costs of creation or maintenance.

Is it a problem if my neighbors are free-riding? It's hard to say. But let's pretend that, in the absence of their contributions, I decided that it was no longer worth it to keep my TDF. Then my neighbors would be worse off because they didn't chip in to support something that they benefited from.

The government addresses the free-rider problem by forcing people to pay taxes. Elected representatives decide how much of the money to give to the various public goods (defense, education, healthcare, environment, etc.). This would be the equivalent of each person in my neighborhood chipping in and electing representatives to decide how much of the money to give to my TDF, litter cleanup, graffiti removal, neighborhood watch and so on.

The problem with this system is that if elected representatives were any good at knowing just how much benefit each and every one of my neighbors derives from my TDF... then all the time we spend shopping would be a fundamental waste of time. Except, who argues that we should get rid of shopping and replace it with the valuations of elected representatives? Nobody in their right mind does... which should give you a clue that there's no reason to believe that elected representatives know how much benefit you derive from nature or any other public good.

Therefore, the current supply of nature is wrong.

If you're incredulous, then here's a more advanced, but very excellent, treatment of the subject... Handbook of Biodiversity Valuation - A Guide for Policy Makers

The easy solution is to allow taxpayers to choose where their taxes go (pragmatarianism). People would be able to shop in the public sector just like they can shop in the private sector.

For more details check out the FAQ.

Basically, in the absence of a market in the public sector... we can't look at the current supply of nature and say that society's heart is in the wrong place. Well... you can say this but it would just reveal that you don't have a basic grasp of public finance.

Once people could choose where their taxes go, then we'd see exactly where society's heart truly is. If we have reason to believe that it's in the wrong place... then it would be our responsibility to share our reasoning with others.

It might take some work to persuade others that they would benefit from more nature, but if we're successful... then it would be easy enough for them allocate their taxes accordingly. With the current system, even if we do manage to convince somebody that we should have more nature, it's not like they can choose where their taxes go. This is why our current system is the cause of rational ignorance.

For a real life conservation example of the problem of not having a market in the public sector... The Ingenious Gentleman George Monbiot.

Let me hedge my bets by using another example...

In the thread on animals rapidly evolving in cities, TomFoolery wrote that she really enjoyed watching the Coywolf documentary on Netflix. I really enjoyed it as well. Are we the only two people in this boat? Probably not.

The thing is, Netflix doesn't know just how much we enjoyed this documentary. It knows how many stars we gave it.... and whether we watched the entire thing... and whether we watched it more than once... but is this information adequate? Nope.

Imagine if we could allocate our monthly fees to the content (shows/movies/documentaries) that we valued most. How many dollars would TomFoolery allocate to the Coywolf documentary? How many dollars would I allocate to it? The amount of money that we allocated to our favorite content would far more accurately reflect our valuations than stars or views would.

It stands to reason that people would watch plenty of shows that they wouldn't allocate any of their monthly fees to. They might even derive some benefit from some of this content. It's not a problem though because they would be allocating their money to the most beneficial content. If Netflix passed this money, minus its cut, to the creators of the most beneficial content... the logical consequence is that less beneficial content would quickly be replaced with more beneficial content.

For more on the problem with content bundles... Crazy Cable Confusion: Costless Content Creation.

Let me know if you have any questions.

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