The fact that millions of people vote on election day is evidence that the private sector can produce public goods. More than that, it is evidence that private production may be superior to public production — a prediction that runs counter to everything you will read in almost any public finance textbook.
How do I get from here to there? Bear with me.
Here is the paradox of voting:
Bp — C < 0,
where B is the benefit the voter receives from having his preferred candidate defeat an opponent; p is the probability that the voter’s vote will determine the election; and C is the cost of voting. By everyone’s estimation, it really doesn’t matter how large B is. The voter could be willing give up his entire wealth if it would ensure the election of his preferred candidate. Even so, the probability that the voter’s vote will be decisive in the election is so infinitesimally small that the expected benefit (the product of the two) will be close to zero. Since the cost of voting is definitely not zero, the cost must always exceed the benefit.
Put colloquially, voting must always be more trouble than it’s worth. And yet millions of people do vote. Why?
Now I’ll interrupt for a personal story. After discovering this paradox as a graduate student, I decided to do the rational thing and for many years I didn’t vote. Then on election day one year our soon-to-be Texas senator, Kay Bailey Hutchison, said to me, “I assume you have already voted?” I couldn’t find the courage to tell her the truth.
As time passed, I began to reflect more on what was going on. If candidate A is running against candidate B, the election of A is a “public good“ for all who prefer her candidacy. Because it’s a public good, we all benefit from her election whether or not we do anything to help make it possible. Hence we all have an incentive to be free riders on the voting efforts of others.
Economics textbooks teach that we act in our self interest. So if it is in our interest to be a free rider, that’s how we will act. Here’s what’s missing from the textbooks. Free riders are not admired. They are more likely looked down upon. Free ridership is not viewed as an attractive feature — and everyone knows it. So few people will want to admit they are free riders or will want to be seen as free riders. It’s certainly not anything that anyone wants to boast about.
There are undoubtedly thousands of ways people can take advantage of this natural human trait. They can persuade other people not to be free riders — to make them want to contribute to an effort (even if it’s not in their narrow economic self-interest to do so) and to make them feel guilty if they do not. An election is only one such example.
In my home town, Dallas, Texas, there are some spectacular public goods erected with private money. There is a magnificent arboretum, a new park that was built over an eight lane highway that connects two parts of down town, a state-of-the-art symphony hall, a new performing arts center, the world’s most expensive outdoor art museum, a unique Asian art museum, a bridge that spans the Trinity River, a one-of-its-kind Ross Perot science museum, an entire downtown arts district — to say nothing of the new George Bush Presidential Library and public policy institute. Also, there is my own National Center for Policy Analysis. I’m just hitting the highlights here.
These “public goods” benefit the entire community. They were mainly funded by contributions of thousands of private citizens (who were of course appropriately honored for their gifts). I suspect that part of the willingness to voluntarily cooperate on projects like these is in our genes. I can certainly see why it would have evolutionary survival value.
Economic theory teaches that the private sector (for which overt coercion is not an option) will tend to under-produce public goods and over-produce private goods. But as I look around Dallas, I see no evidence that would confirm that prediction. To the contrary, I see the opposite. The projects to which I refer are not obviously too large or too small. I cannot assert that they are of optimal size. But there is no obvious evidence of under-production or over-production. Surprisingly, traditional economic theory seems incapable of explaining what is happening before our very eyes.
Public sector production of public goods is a different matter. For two decades Dallas has operated a bus and light rail transit system that has a pitiful cost/benefit ratio. (At one point I think we had the lowest bus ridership in the nation.) The Dallas public school system is a disaster — just like inner-city schools in other large cities. Welfare in Dallas encourages dependency, invites fraud and wastes money in all manner of ways. While Medicaid patients wait all day for routine care at Parkland Hospital’s emergency room, we refuse to allow those same patients to pay far less for flu shots and other basic care at private, walk-in clinics.
Why does the private sector do as well as it does in producing public goods, while the public sector does so poorly? Part of the answer is that in the private sector the beneficiaries of the public good have no direct say in the matter. Strange as it may seem, this is actually a good thing. Another good thing: There are no unwilling (taxpayer) contributors. Private sector public goods are designed and funded by private givers. Although many things may motivate them, maximizing the social value of the project is likely to satisfy them more than suboptimal production.
In the public sector, things are very different. Political rivalry here typically pits taxpayers (whose goal is lower taxes) against beneficiaries of the good (who will always prefer more of it if they don’t have to pay for it). Phil Porter and I have shown that there is no robust political system that will produce optimal quantities of public goods. Government may over-produce them or under-produce them, depending on the relative strength of these competing interests. If the special interests that produce the good can exert their influence, there will be other distortions as well.
In the face of such “government failure,” the private sector can respond in one of two ways: (1) it can produce the good privately and make it available to the whole community or (2) it can privatize the good and provide it to those willing to pay. This latter approach is called “internalizing the externalities.” Writing in The New York Times, Nicholas Kristof notes that this second approach is more common than is generally believed:
- Hurricane Sandy revealed that the East Coast power grid can be unreliable. A private solution: by one estimate, 3% of stand-alone homes in the country worth more than $100,000 now have their own backup generators at a cost of more than $10,000.
- In response to the inadequacy of public policing, 1% of employees in such cities as New York and Los Angeles work as private security guards.
- In place of dilapidated public parks and playgrounds, there are gated communities with private parks and tennis courts.
What determines when the private sector will produce public goods or privatize them? There is no general theory that provides us with an answer.
Phil and I made a major step toward a political theory of public goods. It’s now time to reinvent the economic theory of private production.