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Public Goods

Takings, Liability, and Externalities:
The Appropriate Balance in Classical Liberalism

Jarrett L. Hale
Graduate, Belmont University, 1999
Nashville, TN
Public Goods

The public goods argument is often hotly debated by liberal theorists. The debate ranges from whether public goods actually exist to how public goods can be most efficiently produced. The existence issue is completely dependent upon the definition one chooses to employ in the debate. For the purpose of this paper, I will define public goods as a good which possesses the characteristics of non - excludability and jointness of supply (de Jasay, 1989).

The characteristic of non - excludability refers to a good producing benefits, demanded or not, to all members of society. All individuals benefit from a public good, though they do not all benefit to the same degree. A national defense, for example, is a public good possessing the characteristic of non - excludability, for all members of society benefit from protection and the deterrent characteristics a defense provides. Not all members benefit the same, however, as individuals in the defense contracting industry are certainly benefiting more than some in society. Unequal benefit, however, is not the issue, but whether or not all individuals benefit in some way. It is important to ensure, however, that the good is made public because it is non - excludable, rather than the good made public because the public wants it so" (de Jasay, 1989). In other words, it is the nature of the good in that once it is provided its benefits cannot be denied, and not necessarily the desire for it, which makes it public.

The second characteristic is jointness of supply, which is also referred to as non - rivalry consumption or non - congestion. This refers to the "property of a good which enables one more person to use, consume or enjoy it, rely on, or otherwise benefit from it without the consumption, reliance, benefit, etc. of any other person being thereby reduced"(de Jasay, 1989). With this characteristic present, another person can always be added with no marginal cost. Public goods must be completely available to all at all times, or not available at all. Defense benefits, for example, remain the same whether the population increases or decreases over the next ten years, for each person can enjoy the benefit without diminishing the benefit of another. Once again, this does not indicate that all must benefit equally, but that no one can use the good to the extent that it diminishes use by another party.

Certain goods obviously fall into the public goods category. A good example would be the common defense of the society. For example, if the islanders wished to protect their privately held goods from destruction by the wild animals on the island, they would agree to a joint framework of cost burden to construct defensive mechanisms. Individual attempts at defense could lead to the eventual destruction of one of the members and his goods, which would jeopardize the entire society which relies on his goods in the market structure. The protection from the animals, then, is mutually beneficial to all, and creates a situation in which all have an interest in producing the good. The non - excludability principle ensures each member has some interest in the production, though the amount of interest will certainly vary.

The dilemma in the liberal society is not over whether or not any public goods actually exist, but how to appropriately handle the many problems that are related to their production and are inconsistent with the liberal model. I shall refer to the island model frequently for illustration of these problems, with the understanding that our islanders have now instituted a liberal contract which adheres to the confines of the liberal framework I examined in the earlier portions of the paper.

The first problem which must be dealt with in the production of public goods is the "free - rider" and "sucker" problem. All members of a society will naturally want public goods to be produced, for if they actually fit the criteria of non - excludability we have described, the individual will benefit from the production. For example, all of the islanders would certainly benefit from protection against the wild animals and would support a system which did so. The problem, then, is that many members of society are likely to desire the public good, but remain unwilling to bear a proportionate share of the cost. Should the public good be produced without individual cost burden proportionate to the interest, then all would be mutually benefiting without a representative cost structure. Those who support the maintenance of the good are called "suckers" and those that benefit without proportionate burden are called "free - riders".

To use the island illustration, let us suppose that all the members of the island community determined that protection against the animals was a necessary public good and agreed to equally bear the burden of building traps and trenches around the perimeter of the living areas. These traps require continual maintenance to be effective, which will result in about one hour of labor per day for all ten individuals. Suppose one of the islanders becomes too involved in coconut production to spend more than three hours a week on trap maintenance. One of two things will be the result of this scenario. First, the traps will not be sufficiently maintained due to the lack of work by the individual, and the islanders will at some point be destroyed due to insufficient defense. Second, the other nine islanders may take it upon themselves to labor the additional four hours a week necessary to maintain the traps.

Both of these scenarios are unacceptable in a liberal model, and the results of each must be carefully examined to illustrate the lack of congruence with the liberal framework and the solutions within the model which are available to rectify the situation. I will deal first with the problem of the defense systems not being maintained, for this changes the entire focus of the public goods problem. If the traps are not sufficiently maintained, then the defense system can no longer be considered a public good by definition, because the defense is ineffective and no one is benefiting. The islander causing the breakdown of the defense system is now guilty of fraud, which poses severe problems to the public goods argument.

The island community came together to produce a public good of defense, which was later reduced to ineffectiveness by the lack of responsible behavior of one of the members. We must first look at the implications this has for the other nine members. No free - rider or sucker problem can truly exist in this situation because there is actually no public good in place. The defense system is only a public good when it is non - excludable, and since it is no longer operational, there is no benefit to anyone. The loss of the public good results in a violation of the social contract to produce public goods by definition. This enacts the second order right of nullification for the other nine islanders since the contract has been violated and they are no longer obligated to bear their share of the cost burden. Nullification is a second order right because it can only be enacted when a first order right has been violated, which has occurred through the contract violation. As was mentioned in the discussion on nullification, the members may nullify the contract to produce the defense, but have no grounds to nullify the original social contract. The original contract, rather, is the source of legitimacy for the nullification of the defense contract.

Along these same lines, let us assume that the irresponsible member of society does not inform the other members that he has opted not to maintain his traps, which the other members do not discover because his traps are on the far west side of the protected area. There is still no existence of a public good, but the other members are not aware of this fact and continue to maintain their traps as agreed upon in the contract. This creates an even more serious dilemma in a liberal framework, for not only does the public good not actually exist, but the first order rights of the nine complying members are being violated on the basis of fraud.

The nine complying members of the society continue to maintain the traps they have responsibility for, even though the labor is wasted due to the actions of one individual. This is a violation of their first order rights on several fronts. First, we must examine the result of the lost labor which is receiving no return. The nine complying members are losing one hour per day in the production of the goods over which they have personal ownership in the production of a public good which does not actually exist. This results in the violation of property rights, though the violation is still unknown to the members of the community, except for one. The first violation is present due to the lost labor. Each individual has the right to spend all of their labor on production of goods over which they have ownership unless they are contractually committed to spend some of their labor in the maintenance of the public good.

For example, let us assume that one of the islanders owns the plot of the island to which most of the driftwood floats at low tide. She collects the driftwood before high tide pulls it back out to sea and trades the driftwood as firewood for coconuts with other islanders. She has few coconut trees and needs the additional coconuts to prevent total ravaging of her trees for survival, and the other islanders need her driftwood for visibility at night and the boiling of water to insure purity and avoid sickness. The low tide occurs only during the day, which is the only time she can spend her hour in maintenance of the traps for security purposes.

The one islander has violated the first order rights of this woman in many ways, leading to a situation completely incompatible with the liberal model they had instituted. First, she has lost one hour of valuable labor devoted to her property and survival in the maintenance of a non - existent public good. This property violation is the direct result of the actions of the irresponsible islander, who has violated her right to expend labor on her property. This same situation exists for all nine of the other compliant members, for all are losing one hour of labor per day. The resulting violation can best be described as theft, for the irresponsible individual has intentionally stolen the results of the labor that would have been produced during each hour that was lost. As stated earlier, property is not always a tangible item, for labor and what could have been achieved by the labor were stolen, creating two counts of theft for every hour lost.

The issue of punishment must be examined pertaining to this situation before examining the free - riding problem of the other scenario. We must examine the legitimate action that can be taken within the liberal model once it has been discovered that the irresponsible member has been neglecting the upkeep of the traps and eliminating the public good. There are several courses of action that can be taken, though not all are required to occur in the liberal model. We must examine all of these avenues of punishment and response and place them within the confines of the liberal framework.

The first response to the loss of the public good created by the irresponsible individual has already been mentioned as nullification. The other nine members, having the contract violated by both the irresponsible action and the elimination of the public good, have the right to withdraw from the contract and halt maintenance of the other traps. This would return the one hour of labor to their rightful possession and enable them to focus on the production of their privately owned goods and provide for their own defense against wild animals. This scenario is probably the easiest action to take, for no real punishment against the individual is levied. The dilemma, though the mere nullification is justified if that is the route unanimously chosen by those violated, is that this avenue seems to lack a degree of justice for the individual rights violations.

Restitution for the violation of the property rights must be examined in conjunction with the nullification of the contract. Note that the only nullification justifiable in this situation is that of the contract to produce the public good of defense, for the rights violations were a first order violation pertaining to it, allowing second order punishment rights to exist only within the context of that contract. As stated earlier in the punishment section, the only punishment allowed to be imposed in a liberal model is one of equal restitution. We must examine the process by which equal restitution can be determined in this scenario.

The restitution in this scenario will be quite severe, for many rights were violated of many individuals within the social contract. First, compensation must be made to all nine of the other individuals for the total number hours of labor lost during the maintenance. The value of the lost time must be evaluated, along with the value of the products that would have been produced during that time. A third variable, which will be examined in greater detail in later portions of the paper, is that of the risk imposed upon the other islanders. The nine unknowing islanders lived with a false sense of security, generating a new form of rights violation due to fraud by the lone islander. The islanders did not remain constantly on guard against the wild animals, for they lived with the false assumption that the common defense was being maintained. The irresponsible behavior of the one individual subjected the other islanders and their property to great risk, which must also be considered in the restitution equation.

The nine violated islanders must come together to determine proportionate restitution for the theft. A unanimous agreement must be formed as to what the restitution will be, though this must not exceed the value of what has been violated. For example, the islanders may choose to have the irresponsible islander spend ten hours a day maintaining the traps, thereby costing the same amount of lost labor as the other islanders, and subjecting him to a great amount of risk since he will be on the outskirts of the camp for so many hours a day. The other islanders would be free from maintenance until all the hours stolen have been returned in labor. Once agreed upon, the irresponsible islander is bound to comply with retribution that does not exceed the value of what was taken. He cannot nullify the contract, for the liberal social contract stipulates a second order right to punish with proportionate restitution once first order rights have been violated.

Should the irresponsible individual refuse to pay equal restitution as determined by the other nine islanders, and this restitution is proportionate to the taking, he is not justified in his nullification attempts. The remaining course of action is for the nine islanders to nullify the standing of the lone individual in the social contract, for the irresponsible islander has now violated the initial social contract. The nullified contract can be immediately reinstated without inclusion of the irresponsible individual, thereby making a liberal community of nine instead of ten. The one member left out of the community now loses all the benefits of the liberal community and is forced to survive without the justifiable protection of his property and the peaceful survival the market once offered him. The threat of being removed from the liberal society is the ultimate check against one who violates the rights of others. The benefits of the liberal society greatly outweigh the prospects of living alone outside of it, which leads to the belief that the islander will comply with the punishment so long as it adheres to the punishment stipulation of equal restitution within the liberal model. While the lone islander will obviously receive some benefit from the goods created by the community even though he is outside the social contract, the community can eliminate the individual from participation in the market process. The loss of access to the market process will force the individual to spend much greater amounts of time producing goods for his own benefit, rather than obtaining them in the market. Access to the benefits of the market will prevent most cases of individuals opting to live outside the social contract, for individuals outside the social contract cannot rely on the protection it guarantees.

The second aspect of the island defense scenario brings the "free - rider" and "sucker" problem into plain view. This issue is separate from the first due to the principle of non - excludable benefits actually being maintained. The problem, however, arises in the fact that the islanders had contracted equal share of the cost burden because they assumed they all benefited equally. This second aspect exposes two public goods dilemmas. First, the presence of non - excludability does not imply that all members should share equal cost burden because not all benefit the same, even though they all benefit. Second, attempts at equal cost burden to all benefiting members will likely result in the most severe "free - riding" problem.

The second example we will examine deals with traps which are sufficiently maintained to provide adequate protection from the wild animals on the island. The problem, however, lies in how the traps are maintained. Let us assume that one of the individuals, to make the equation simple that can later be expanded, is again only devoting three hours of labor per week on the maintenance of the traps. His traps, however, are located in a section of the island where few wild animals exist, and therefore do not constantly have to be reset and maintained as the others do. The result is that the I.D.I., or island defense initiative, remains fully operational without the agreed upon seven hours of labor by this one individual. The other islanders, however, must spend a full one hour every day to maintain the efficiency of the I.D.I.

The scenario has now expanded to include free - riders and suckers, which is unacceptable in the liberal model construct. Although all principles of the public goods criteria have been met, the contract of equal cost sharing has not. All of the island dwellers are enjoying the defense benefits equally, for all can now rest easy at night without worrying about the attack by wild animals, and this is one requirement of the public goods definition. The problem lies, however, with the burden of the cost. While all the islanders are benefiting equally from this situation, the cost is not evenly distributed, which was a requirement of the defense contract. I stated previously that a truly public good must possess non - excludability, but the defense contract stipulated equal cost. Regardless of the fact that the I.D.I. is operational and meeting the needs of the community, the scenario is still incompatible with the original contract because one islander is receiving equal benefits for unequal cost.

The "free - riders" and "suckers" in this scenario are probably easily disseminated, but I will define them for clarification purposes. The free - rider is obviously the one individual not employing one hour of labor per day, for a free - rider is one who enjoys the benefits of a public good at the expense of others. The sucker is the inverse of the free - rider, for he is providing the labor for the benefit of another. The fact that the complying islanders are receiving the desired defense benefit for the agreed upon hour of labor is irrelevant, for the unequal burden creates a situation incompatible with the liberal model due to the original contract.

The violations of the rights of the complying members must be evaluated in this situation, as well, for many of the same dilemmas arise along with several new ones. The theft argument, which will be explained below, applies in this situation, as well. The risk violation appears minimally when compared to the first scenario, though it does still exist. The question of punishment and proportionate restitution must be evaluated along the new lines of violation.

The issue of theft is still present in this scenario, even though the circumstances have drastically changed. The irresponsible islander has not stolen an entire hour from all the other islanders, for I.D.I. is operational and working as intended. The hour spent daily by the complying members, then, is not wasted as it was in the first scenario. The new situation involves theft of a much smaller amount of time. For example, if the irresponsible islander had spent the three hours required on his traps and spent the other four hours per week assisting in the maintenance of other traps, then the time spent by the other islanders would have been cut down, even if only by a few minutes. This results in theft of those minutes, and theft on a small scale is just as incompatible with the liberal model as theft on large a scale, for both are violations of individual property rights.

The risk factor is not as great in this scenario as the first, but a certain degree does still exist. I alluded earlier to the fact that time spent at the traps on the outskirts of camp were a risk in themselves, for the individual is closer to the wild animals. This risk is agreed upon in the creation of the I.D.I. as acceptable for the benefits of security. At least two types of cost are implemented in this I.D.I. contract, that of labor and that of risk. The lost labor is a financial or material burden, as the loss of labor for the driftwood gatherer, for instance, cuts the time she can gather wood to trade for coconuts. She pays a cost of another type, however, in that she agrees to place herself at risk for one hour every day for the security of her liberal community.

The agreed upon I.D.I. contract, then, requires all islanders to spend one hour of labor per day, which is a material cost, which is one hour on the outskirts of camp, a risk cost, for the security of the community. These have been agreed to be acceptable prices to pay for the benefits returned. The problem in this situation, however, is that nine of the islanders are paying more materially and undertaking more risk than is necessary for the desired benefits. The free - rider is not suffering equal cost or risk in this situation, and the suckers now face a violation of their individual property rights.

The violation of property rights is not on the same level as in the first example, but is a tremendous problem, nonetheless. Not only could the material burden be lessened on all if the one islander were responsible, but the risk to all the inhabitants could be lessened, as well. All of these burdens could be lessened while still maintaining the same degree of benefit in the overall defense. This violation of the public goods definition violates the liberal construct, and the nine islanders are now justified in seeking restitution for the violation of their property rights.

As stated previously, the restitution in this situation is not as great. The first option I examined in the first example was nullification, which is still a justifiable option since the contract has been violated. The overwhelming benefits of the I.D.I., however, are likely to prevent nullification from becoming the option invoked. The remaining options are to seek restitution for the violation damages from the one irresponsible member, who is likely to seek continuance of I.D.I. benefits, as well.

The violated members must convene in this situation, as well, to determine proportionate restitution for the property violations. The most logical option is to require the irresponsible member to work additional hours on all the traps until the time is matched, and then require him to spend the additional four hours per week from that point in assistance of additional trap maintenance. The initial adding of hours per day to pay back the lost labor and increased risk will allow the islanders more time devoted to private property production and maintenance equal to that which the irresponsible member acquired. The risk will be leveled by the irresponsible member being required to spend greater initial amounts of time on the outskirts of the camp, allowing more time inside the camp for the other nine, eventually equaling the risk factor imbalanced by the free - rider.

This section has been an examination of a very simple public goods scenario, but I hope it has been effective in demonstrating the problems arising from the public goods dilemma. The problem of "free - riders" will be present in the production of any public good, making the challenge to find a method which minimizes the problem. I feel the classical liberal framework utilizes the focus on individual liberty and private exchange to limit the "free - riding" problem to the most minimal level by internalizing personal benefit cost as much as possible. The simple scenarios also have real - world parallels that illustrate the need for an improved public goods production system.

The first example depicted a public good, or the defense system, which was not actually being created at all. This resulted in fraud by the individual and negated the efforts of the other islanders. Many parallels exist in communities today, but the United States welfare system is a prime example of this problem. Many consider aid to the poor to be the morally superior action, but the argument behind welfare being a public good is the non - excludable benefits to society of keeping large amounts of people off the street and not resulting to violence to acquire goods needed for sustenance. The aid allows for education, as well, for the aid allows mothers to send children to school and refrain from sending them to work to fend for themselves. The general benefits of an educated populace are also deemed non - excludable. Benefits such as education must actually be broken down into two separate categories of private and public goods. This separation will take place in the later discussion of privatization and de - centralization.

The issue is not that welfare benefits are non - excludable benefits, but whether or not the good is actually being produced. Taxes are taken from each citizen to pay for welfare benefits, but the vast majority of recipients remain in poverty, due mainly to poor welfare systems established by the federal government. Political dysfunctions and/or poor planning result in fraud and/or misdirected funds by the government; it takes funds from citizens to provide a good which is not producing the results which can be deemed as non - excludable. In this situation the public may choose to invoke nullification of the federal government in this area, lowering obligation to a lower institution which can institute a better method of actually providing the good for which the public pays. For example, welfare benefits may actually be considered a public good when they accomplish the task for which they were designed, such as removing people from the street and placing them in a position to receive education and employ themselves. This may only be effective at the local level, where local officials can observe and control the situation. The local populace, likewise, is probably more inclined to help the poor within their own community, for the benefits can be readily seen. Welfare taxation, then, can be nullified at all levels except the local level, for the local level is where the good is actually produced.

The second issue we examined demonstrated the complexity in providing public goods at equal cost to everyone. The islanders contract was doomed to failure at some level because not all of the islanders benefited the same, even though they all did benefit. Equal cost is not the answer, but proportional cost is a viable solution. The parallel to this problem is a sales tax to pay for roads in local communities. Some members may use the roads extensively, but purchase very few goods, while some may seldom use the roads but purchase many goods with which to operate their farm. The liberal framework attempts to institute a proportionate cost structure in which individuals pay for what they use. Methods of de - centralization and privatization to achieve these ends will be discussed at length in the following sections.