Providing for Public Wants

No private firm could sell you a cleaner envi­ronment without simultaneously providing it for your neighbors. Nor could a neighbor pri­vately buy national defense without protecting you. Because no individual willingly bears the costs of adequately accommodating everyone's desires for goods of these types, price signals emitted by consumers are distorted and firms cannot privately market these goods profitably. Even if firms operate in a stable and com­petitive environment, certain market failures may still seem to justify government action. Externalities, of which pollution is one form, can warp price signals so that our demands are not accurately reflected. A difficulty called the pub­lic goods problem results when shared con­sumption is possible but people cannot be denied access to the benefits of a good. National defense is an example.

• Externalities Externalities occur when some benefits or costs of an activity spill over to parties not directly involved in the activity. For example, when farmers spray their crops, some pesticide may eventually wash into nearby lakes or streams. If the pesticide is absorbed by mi­croorganisms and works its way up the ecolog­ical chain, your fishing or health may deteriorate so that you partially bear the cost of the use of chemical sprays. Most human activities gener­ate externalities, some trivial and some of major concern. Cooking creates heat and smoke, cars emit noxious fumes, and loud stereos annoy neighbors. All forms of pollution—chemical, air, noise, and litter, are negative externalities.

Producers who generate negative external­ities tend to ignore costs imposed on others, and the prices they charge reflect only their private costs. Pollution-generating goods consequently tend to be overproduced and underpriced. The government uses regulation to limit various pol­lutants because a total ban on pollution would probably eliminate all production. There are trade-offs between the cleaner environment most of us would like and the higher consump­tion levels most of us desire.

Inefficiency may also occur when positive externalities spill over from an activity. Immunization against contagious diseases is an example. You are less likely to suffer from the flu if you are inoculated, and we who are your neighbors are less likely to catch it as well. But you tend to ignore our benefits when you de­cide whether or not to be immunized and so are less likely to get a flu shot than is socially opti­mal. Thus, private decisions result in under­production and overpricing of goods that generate positive externalities because the value to society exceeds the demand price individuals willingly pay when they are uncompensated for external benefits.

• Public Goods Keeping violent criminals be­hind bars makes the world more secure for the rest of us, so the safety a prison system provides to society is an example of a public good. Public goods are both nonrival because numerous peo­ple can consume the same unit of such a good si­multaneously, and nonexclusive, because denying access to such goods is prohibitively ex­pensive. Most goods are private goods. If you eat a corn chip laden with guacamole, no one else can enjoy that particular morsel—such pri­vate goods as food, raincoats, or shaving cream are rival and exclusive.

But we need not compete with each other to use public goods once they are produced be­cause their use does not involve rivalry. Most cities would suffer terminal gridlock without traffic lights, which smooth traffic flows and cut accident rates. All drivers benefit simultane­ously. Other public goods include research on such things as weather or cancer, democratic government, and national defense. Once the armed forces are maintained and ready, every person in the United States consumes defense services simultaneously, and we all receive this protection whether we pay (through taxes) or not and whether we want it or not.

Public goods cannot be privately and prof­itably marketed to efficiently service our collec­tive demands for them. A few people might contribute funds for a nonrival good from which exclusion was impossible, but not enough for ef­ficient provision. There is little incentive to re­veal your demands for police protection, space exploration, spraying against mosquitoes, land­scaping along a public highway, or maintaining courts and prisons if you will be taxed accord­ingly. Why not be a free rider? Private firms could not adequately market such services, so government provides a variety of public goods and forces us to pay for them through taxes.

Public provision does not, however, require public production. For example, NASA space probes use equipment built by private firms. Alan Shepard, the first American in space, re­ported that the last thought that flashed through his mind before his rocket was launched was that it was made of millions of parts, ". . . all built by the lowest bidder."