Sunday, November 18, 2012

Shall We Continue in Sin, So That Grace May Abound? God Forbid.

. Sunday, November 18, 2012

I used to blog sometimes about how many things we call "public goods" really aren't. People label things they like "public goods" because it eliminates opposition of the public provision of these goods. So folks call all sorts of things "public goods" which are not public goods: education, health care, etc. Actual public goods, which are both non-excludable and non-rival in consumption, are pretty rare. I stopped harping on this because I thought I'd made my point and nobody else seemed to care.

But now I see Mike Munger twisting himself into knots over whether roads are public goods, so I'd like to revisit the topic. Munger's conclusion is that roads are public goods, kind of, sometimes. But not other times. He reaches this conclusion by comparing the marginal cost of use under different scenarios: if the addition of the marginal car has a zero (or near zero) impact on the cost of the using the road then it is a public good; otherwise it is not.

This is mistaken in the same way that it is mistaken to say that the "Tragedy of the Commons" is a story about externalities (or public goods). A public good is not defined by comparing the cost of additional units of consumption at various margins. For true public goods the marginal cost of additional unit of consumption is negligible at all margins. That is the definition of a public good: increasing consumption does not reduce the amount of consumption available to others. When we compare costs at varying margins all we're doing is talking about relative levels of scarcity. Public goods are not, cannot, be sensitive to scarcity.

To understand where this logic ends consider that under Munger's definition -- public goods are good, and less-used roads are the most public goody of all roads -- we should build a bunch of roads (and bridges) to nowhere. Almost no one will use them, so the marginal cost of an additional vehicle will be the closest to zero that it can possibly be. Let's start building!

This is the sort of absurdity for which Saul of Tarsus admonished the early church in Romans 6: if God's grace is good, and grace is only extended to cover sins, then should we sin as much as possible in order to maximize grace? Of couse not. Similarly, we should not build roads which will not be used.

Roads are excludable: to use them you must possess a motor vehicle as well as an assortment of licenses and insurance contracts which permit you to operate that motor vehicle on that road. You and your vehicle must also physically be in the place where the road is. Roads are also rivalrous in consumption: the more people use them the fewer additional people can use them without congestion. Roads are therefore not public goods. Ever.

It does not necessarily follow that there should be no public provision of roads. Just because something is not a public good does not mean that there is no reason for public provision of it. There may be a case which can be made on consequentialist grounds that collective action (via taxation) to provide a non-public good is justifiable. I believe that many roads will pass this sort of cost-benefit test. But this case needs to be made on its own merits.

And if we make that case on its merits, we will likely come to the opposite conclusion of Munger: scarcely-used roads in rural areas are the ones which should be tolled/taxed. Why? Because the case for public funding of roads is not that they are public goods, but that they increase efficiency by reducing transaction/transportation costs. They function like a utility in an environment where a monopolistic market structure is likely to be more efficient than a competitive market structure so long as the monopolist is not a profit-maximizer (i.e., where the monopolist's producer surplus is redistributed to consumers, i.e. where the monopolist is a government -- subject to an electorate -- rather than a firm). Those efficiency gains will be highest when and where the roads are used the most, and lowest when and where the roads are used the least. Public subsidization should be highest where there is the most potential for efficiency gains. This occurs in the busiest areas.

If we see lots of congestion on some roads that is a signal that we should build more roads there. Not to make roads more like public goods (by reducing the cost of the marginal unit of consumption), but to try to reap the social gains from whatever economic activities are causing the congestion. If we cannot build more roads (because there is no empty land, say) then we should build some other transportation network, like bike paths or subways, to allow people to engage in productive activity more easily. The positive spillover effects from such investments are more likely to pass a cost-benefit test than in a rural area.

I'm not opposed to congestion pricing in general, but we need to recognize congestion pricing for what it is: a tax on productivity. People don't drive into Manhattan during rush hour because they enjoy it. They go through that nightmare to get to work, often in high-wage/high-productivity sectors of the economy. I'm not sure why we'd want to discourage that.

7 comments:

Phil Arena said...

Well said.

KV said...

You are being rather pendantic in your definition, and rather confused in your argument. Yes, technically a pure public good must be entirely non-excludable, but goods that are simply fairly non-excludable (common pool goods, according to Wikipedia) are mostly understood in the same fashion. Concerning your argument, whether or not something is a public good does not directly affect whether or not a utility-maximizing authority should pursue it, only whether the failure of private interests to pursue it should bear on the decision. For instance, a private lighthouse is a fairly silly proposition, as (barring nonexistent oceanic property rights) the ability of a private company to exclude non-compliant customers from using a lighthouse is limited. However, that does not mean that the government should build them everywhere: there is a cost associated with their construction, and that should be balanced against its utility. The same can be said for rural roads: if the overall economic benefit overwhelms the base cost of the road but not the cost of road with exclusivity monitoring, then a UM government should build it and not charge for its use explicitly. Conversely, a well-congested road, while presumably congested for the reasons you discussed, is obviously not non-rivalrous and probably not non-exclusive: multiplying a modest charge by the number of users would easily cover the cost of the regime.

One could ask the question of why such a good wasn't provided privately: in this case, because of a poor tradition of private roads. Certain roads/bridges may have a monopolistic feel, in which case it is reasonable to have a regulatory regime prevent the economic benefit of the road funneled into monopoly rents. In the case of, say, avenues in Manhattan, this monopoly power is rather more limited: with the exception of reaching locations on those specific roads, one could use whichever appropriate avenue had the lowest current fee (estimated, say, by current occupancy). These fees can then be channeled into paying for road upkeep/building new roads/subsidizing alternate transportation, all of which satisfy your goals.

Also, for future reference, saying that roads are excludable because you need to own a car in the area along with the right to drive is rather silly: yes, you can bar someone from using all roads, but once you allow one road it's rather difficult to stop them from reaching any particular road should they want. If the only way you could stop someone from eating your bread was to stop them from eating bread at all, I would definitely call bread a (quasi)- public good.

Kindred Winecoff said...

KV -

You say my definition is pedantic. Well, definitions tend to be! What else *could* they be? Don't get on my case about "Yes, well, technically...". Technicality is important in these matters, and Munger's entire post is dedicated to the finer points of definition. It is in that spirit that I wrote.

As I said, the definition of "public goods" is loaded, politically. If you can get something designated as a public good then there is no intellectual case for opposing its provision. Given that, I think preserving a clean meaning for the term is worthwhile. Perhaps you prefer mush.

My argument may be confused, although more likely it is confusing. But you seem to have gotten my drift...

If public goods are "mostly understood in the same fashion" as common pool resources then that is an error (though not on my part). The two are different in very important ways. It's not clear (to me) that roads are a common pool resource either, since they are planned and constructed with intentionality. But maybe the opposite case can be made.

You say "whether or not something is a public good does not directly affect whether or not a utility-maximizing authority should pursue it" as if it contradicts anything I wrote. It doesn't. Please see the last four paragraphs of my post. Hell, read all of it again while you're at it.

The rest of your comment is, as best as I can tell, irrelevant to what I wrote. Most silly is your analogy between roads and bread, given that (nearly) all roads are paid for by the public purse while (nearly) all bread is supplied privately. That indicates that there might be some significant differences between the two. You might start by thinking of collective action problems in a consequentialist way.

KV said...

I think you misunderstand the part that I am contesting. You appear to be arguing that if something is determined to be a public good, then it should always be provided: if it should not always be provided, then it must not have been a public good.

"To understand where this logic ends consider that under Munger's definition -- public goods are good, and less-used roads are the most public goody of all roads -- we should build a bunch of roads (and bridges) to nowhere. Almost no one will use them, so the marginal cost of an additional vehicle will be the closest to zero that it can possibly be. Let's start building!"

I don't see where in Munger's definition he says that public goods are essentially good, rather than simply things that wouldn't be produced privately: whether they should be produced publically is a different matter.

You say that "Roads are therefore not public goods. Ever." I am arguing that, to a great extent, scarcely used roads can be public goods (and are, excluding the possibility of banning individuals from all roads), but that that fact does not make them "good".

As to your other comments:

1) Yes, I prefer "mush", or as I say, continua. Most things lie somewhere on a spectrum.

2) My "silly" analogy was intentionally so: it was imagining a hypothetical world in which the only way to prevent someone from consuming your excludable resource was to prevent them from consuming all associated excludable resources. If you want a less silly analogy, the fact that you can prevent someone from listening to your radio station by preventing them from buying a radio/radio components perhaps makes radio exclusive, but only in the most perverse sense.

3) As far as I can tell, a common pool good is precisely one which, at certain margins, acts "like" a public good, while at other margins tends to behave in a non-rivalrous manner (I misspoke about non-exclusivity). Yes, they cannot be treated the same in economic models, but I would argue that the former is simply a limiting case of the latter. For instance, for all reasonable purposes, a streetlight is a public good: if enough people crowded around it, it would eventually become rivalrous, but that would be considered a pathological case.

SBD said...

It seems to me the larger issue is whether roads should be defined/not defined as public goods as relates to their 1st order function (transporting cars) or 2nd order functions and beyond (creating transportation networks that are widely shared and can be used to facilitate business transactions, lower costs of goods, and contribute to overall economic growth). If we think about road solely due to their 1st order function, sure, they are not public goods. But, that claim becomes more dubious as we think about 2nd order functions. It is very hard to make the case that you can exclude an individual from gaining utility in the form of a lower price of a t-shirt (or a loaf of bread, for that matter, to bring in previous commenter's example) that a functioning road system provides. In terms of non-rivalrous in consumption - it seems pretty far-fetched to claim that a national road system can only sustain a meaningfully finite amount of commercial traffic. Too many trucks on the road doesn't seem to be a major barrier to commercial entry in the US, at least.

Alexis Marlons said...

All point in every angle well elaborated. People, read up! Good post..

Kindred Winecoff said...

KV, it is possible that I misunderstood. I am not saying that if a good should be provided then it must be a public good. Nor am I saying that all public goods should be supplied always and everywhere. What I am saying is that *if* something can be called a public good then it becomes more easily justified. This leads to "public good inflation", where everything with any possibly-imagined positive spillover effects are called public goods. See SBD's comment.

I have never seen anyone claim that public goods are bad. The assumption underlying public goods is that they are good: that society would benefit from the presence and suffer from their absence.

1. But public goods do not exist on a continuum. Something is either a public good or it is not. If it is excludable and/or rivalrous in consumption then it is not.

2. No, I disagree. The radio spectrum is a public good. Any particular radio station is not (although it gets closer than roads, because it is non-rivalrous in consumption, and the capital investment required to consume it -- buying a radio -- is much lower than that required to benefit from a road).

SBD, a few points:

a. This is what I mean: just because something generates positive externalities does not make it a public good. A Harvard education generates positive externalities, but it is not a public good.

b. Congestion is a major issue in many cities (see Munger's original post which raises this issue).
3.

Shall We Continue in Sin, So That Grace May Abound? God Forbid.
 

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