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

technicallogistical exclusion cost would be quite low (indeed.substitutes. This. in a broad sense negative as exclusion would permit student selection. it is perverse to argue that this is a true case of market failure. the more efficient it is to provide it publicly. The dilemma presents itself. 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. less pure but quantitatively far more important examples. With education becoming a public good affording free access. In this case. 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. and children's playgrounds are provided as public goods. A pure example is a children's playground. It may have quite worthy moral reasons for doing so. a tendency is created to their chronic overconsumption. One is free universal education Most countries provide it to age 16. Access to it is excludable at low cost by a fence and a ticket collector at the gate. . society would suffer deep moral embarrassment if rich children could use the playground but poor ones could only watch them from the outside. dumb and sub-scholarship standard pupils. the share of public goods in the national product expands vastly. It also mistakes the public goods dilemma for a version of the prisoners' dilemma. in turn. It is intangible and is only revealed by the choices it inspires. There are other. 2. 3. and that would in turn lower production cost). the public goods dilemma has only a non-cooperative equilibrium solution. But it must not be overlooked that since public goods can be consumed at zero marginal cost. 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. involves an encroachment of the public upon the private sector and a cascade of adverse indirect consequences. but because society does not choose to entrust the matter to it. It then finds that like the prisoners' dilemma. Therefore real exclusion cost would be unbearably high. However. but social ethics would not tolerate the exclusion of poor. not because the market cannot cope. some to university degree level.

as well as the value he attaches to having the public good instead of resorting to private substitutes. the pair 'best or worst' is intrinsically neither superior nor inferior to the pair 'second-best or third-best'. The problem becomes simply a case in the theory . however. namely 'non-rivalry in consumption'. The market will fail to produce the public good. nor the sucker strategy unquestionably the worst. the contributor is a sucker. In the standard theories of market failure. The non-contributor gets a free ride. For the sucker. The critical values of these variables depend on a complicated set of factors that cannot be detailed in a brief essay. 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. 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.g. so that a minimum number of contributors is needed to produce even a single 'lump' of it (e. In the face of these two pairs of possible outcomes. it is that he contributes like everyone else (the second-best) or that he contributes when some others do not (the third-best). Rationally. the free rider and the sucker. leads to a pair of uncertain alternatives. it is intuitively fairly clear that there is nothing foredoomed about public goods in general. 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. unless forced to pay taxes. if the public good 'education' comes in 'lumps' no smaller in size than a schoolhouse and teacher) Consider. neither is the free rider strategy unquestionably the best. For the standard theory. the conclusion is easy: there will be few or no contributors. particularly if it is indivisible or 'lumpy'. 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.Individuals. Each of the two possible social roles. have two choices with regard to a public good: to contribute or not to contribute to its cost while enjoying its benefit. This criterion means that consumption of it by one person does not reduce the amount available to any other person. however. However. For the free rider they are the free ride (the best) or failure of the public good (the worst). In effect. the would-be free rider who must weigh the attraction of a free ride against the risk that by withholding his contribution. 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 free rider strategy is 'dominant'—it is always the best whatever anyone else may do.

* Anthony de Jasay is an Anglo-Hungarian economist living in France. Social Contract. Justice and Its Surroundings.o. .of risky choices. was published by Liberty Fund in the summer of 2002.. Public goods can thus be brought back under the calculus that guides homo oeconomicus. 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. a. His latest book. The provision of public goods does not presuppose collective choice that overrules individual ones by the brute force of politics. Free Ride (Oxford 1989) and Against Politics (London.1997). of The State (Oxford. 1985). He is the author.