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Complex Publics Goods Dilemmas - Liberal Solutions

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

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

I will attempt to illustrate the complexity of the public goods dilemma by using the island illustration. I hope that placing the dilemmas in such a simple and small framework will exemplify how these dilemmas are enhanced on a larger community scale. Once again, I will operate within the assumption that the island community has instituted a purely liberal framework based upon individual liberty and consent, as described in the liberal model section. The public goods dilemmas will be placed within this framework to point out the inconsistencies that exist.

The island community has now formed a liberal framework and divided all the material property of the island into individual ownership. All of the individuals possess ownership of some item essential to survival of the whole, and a free market has emerged based on cooperation for the acquisition of all items. As we discussed in previous examples, the islanders have initiated a wonderful plan of the island defense initiative, or I.D.I., to prevent against wild animal attack. Equal sharing of both material burden of labor and the burden of risk have been agreed upon as equivalent to one hour per day of work on the traps. All of the members adhere to the bargain from the outset, but problems soon begin to arise.

Let us assume that one islander, whom we shall name Larry, has decided that the cost of the burden is to great. Larry lives in a small hut against the beach which back up to steep mountain cliffs rising hundreds of feet into the air. Larry owns the beach, and survives by catching fish and trading them for essential elements needed for survival. Larry, it seems, must catch his fish at night when the fish are nearest the shore, and must sleep during the day. Secondly, the position of Larry's hut makes an animal attack nearly impossible unless a lion were to swim ashore or parachute from the cliffs. Larry has come to realize that he does not need the benefits of the public goods nearly as much as the other islanders, based on the following arguments.

First, Larry knows an animal attack is nearly impossible considering where he dwells. Secondly, the wild animals always attack at night, and Larry is in his little fishing boat in the ocean at night, anyway. Larry has determined he really has no need for the traps designed to ensure security, and is now refusing to spend the one hour a day in the maintenance of them because it is no real benefit to him.

Larry adds to this argument the risk factor. Larry is virtually in no danger of an animal attack except when he is working on the traps, thereby creating unnecessary risk. The other islanders may see the risk as acceptable for the benefit, but Larry does not. Larry agrees to discuss this issue with all the other islanders, but maintains that the contract is unfair in the liberal framework.

Another of the islanders, whose name is Bert, hears Larry's complaints and decides he has a few of his own. Bert, however, makes the claim that Larry is actually getting the better end of the deal when compared to himself. Bert, unlike Larry, owns a heavily wooded section of the island and lives in a tent in the jungle. Bert makes his living gathering the wild herbs and roots in the jungle and concocts them into salves and ointments for injuries and illnesses. Bert lives closest to the outskirts of where the traps are laid, and also lives in the area most inhabited by wild animals.

Bert brings his claim to the people, as well, refuting Larry's argument with his own. Bert claims he should not have to work on the traps for a full hour every day and face the risk because he lives in the area with the most risk attached. The other nine are essentially making Bert pay for what he would be forced to do anyway, and people like Larry are free - riding on Bert, at least according to Bert. Also, Bert must spend a great deal of time wandering through the jungle to find his herbs, which is a risk none of the others must face.

The arguments of Bert and Larry create quite a dilemma within the rest of the community, for they now begin to claim other discrepancies. One claim arises that Blake, the animal catcher, hangs the meat he intends to trade outside his hut to cure and actually draws the lions to the community, and he should therefore spend more time on the traps since he is a large part of the original problem. Blake, however, claims that the lions he kills for meat trading actually lowers the lion population and should relinquish him from many of the trap maintenance duties. Rebecca, the previously mentioned wood-gatherer, claims her materials are the main elements of trap construction and should alleviate her from all responsibility other than material provision. Finally, Jackson, who gathers stones from a valley in the community to make tools, claims that the noise of the lions being caught in the traps reverberates in the hollow he lives in and causes him to lose sleep that the others do not. Jackson claims, then, that he should be allowed to spend thirty minutes of his maintenance time napping to make up for the thirty minutes of sleep he loses every night.

While this example is very simple and humorous to a large degree, it serves to exemplify many of the problems associated with public goods within the liberal model. Each of these claims may seem somewhat ridiculous in the island context, but they are very real dilemmas in the liberal model. Each of these complaints represents an actual problem which must be solved within the liberal context.

The first complaint came from Larry, who essentially feels he does not need the I.D.I. and refuses to pay for it. This problem arises when members of a community are required to fund public goods in a disproportionate manner, for the cost does not benefit Larry as much as the others. Larry pays the same price as all the rest, but essentially receives nothing in return. The opposing islanders, however, will certainly claim that without the community, Larry will die from lack of trade. The community, conversely, will be destroyed if Larry does not serve his part in maintaining the I.D.I. This is a classic example of cost versus benefit that is evident in every political framework.

The second complaint, coming from Bert, is also a prominent argument, though not from Larry's perspective. Bert feels he should be relieved of much of the burden because he lives nearest the borders, when actually a liberal model would promote the opposite. This is the inverse of Larry's argument, and the two can be fused together. The logical explanation within the liberal framework is that for true justification, Bert should actually be paying more than Larry because he is receiving a greater benefit. If the I.D.I. works effectively, Bert will receive the same benefit from one hour of work that would require him to spend at least ten on otherwise. Larry, in this situation, is the sucker and Bert is free - riding, for Larry would not be in danger even if the I.D.I. were not in place. Even should Larry be allowed to limit his maintenance to ten minutes a day, that is ten minutes Bert does not have to spend that he would otherwise. Larry, then, has a valid argument, and Bert is seeking to gain more benefit than he is willing to pay for. This situation is incompatible with the liberal model, given that Bert and Larry are receiving drastically unequal benefits for equal cost.

The third argument arose from Blake, who brings an entirely different issue to the table. This evolves into more than a cost - benefit analysis, but involves the issue of risk. If Blake's meat industry is truly drawing the lions to the camp, then Blake is forcing a great deal of the cost of his business onto those around him, which is a violation of property rights. Blake, then, is instituting the dilemma of risk by placing additional cost on the other islanders. This is a classic example of negative externality. A negative externality is a social by - product created which directly violates the individual rights of others. Externalities can be either positive or negative, with Blake claiming positive and the others claiming negative.

Blake claims that his meat business actually kills lions, reducing the risk of attack. He views this as a positive externality, for the community benefits from what he will do even without the I.D.I. The community, however, claims that the business is a negative externality due to the drawing of the lions. While both arguments have some validity, the negative argument is more plausible. Should the I.D.I. not be in place, Blake would kill lions anyway, creating the situation in which Blake is not really providing a defense benefit, but a market benefit. This argument is centered around the defense benefits being debated. His meat hanging, however, if it does draw lions, is a true negative externality. If he were to hang the meat outside of the camp, the risk would be reduced that much more. Blake, then, is forcing the other islanders to pay for the convenience of hanging his meat near his hut. The islanders are merely seeking to internalize cost of the I.D.I., which would involve a greater burden to Blake. Internalization of cost will be closely examined in later sections.

The fourth argument to arise came from Rebecca, who has a much more legitimate argument for positive externalities and a strong argument for unequal cost. The traps are made from Rebecca's wood, which until now was granted for free. Rebecca now realizes she has a case for compensation, for she is bearing more material and labor cost than the others. Rebecca not only loses the one hour in maintenance, but an additional hour to the gathering of wood for traps that the others do not lose. In this situation, her business is providing external benefits to the others for free, but at her cost. This dilemma is obviously incompatible within the liberal framework, for Rebecca is bearing more of the cost than she should bear, and is serving as a sucker for all the others. Rebecca begins to claim an unjust taking of her wood, and refuses to produce more until a just compensation is agreed upon. This compensation may take many forms, but must be unanimously borne by the other nine members. Just compensation will be examined with cost internalization in later sections.

The final argument arising from this framework is from Jackson, the toolmaker who claims the noise from the traps keeps him awake at night. While this may seem like a silly argument, this is actually a very difficult dilemma in the liberal framework. This phenomenon, too, is a spillover negative externality he claims violates his individual rights. Jackson actually has a legitimate claim, for the traps could possibly have been placed in areas where this could be prevented. The traps are currently situated to meet the convenience of other islanders, and Jackson is bearing the cost of their convenience. Although the spillover of noise was probably unintended, how will the community deal with this legitimate claim? The unequal cost question arises again, for Jackson is essentially bearing a greater cost than the others.

All of these arguments represent real dilemmas that occur in the production of goods, both public and private, in a community. The liberal model, though, seeks to solve these dilemmas with an emphasis on the protection of individual rights. I will now begin to look at the issues which arose out of the liberal island model, applying possible solutions to each islanders' concern. I will refer to the island model frequently, using the islanders as demonstrations of the solutions. These solutions must be constantly evaluated within the guidelines of a liberal structure to ensure adherence. Once the solutions to the above dilemmas are proposed and evaluated, I will move to apply these same scenarios to issues involving property rights justifications for intangibles such as speech. I will finally culminate in an evaluation of the system to determine its effectiveness and efficiency in providing goods for a community while maintaining individual liberty.

Liberal Solutions

The classical liberal system seeks to employ methods which effectively deal with cost burden and benefit inequality through a preeminence of individual property rights. The model operates under the assumption that emphasis placed on proportionality between cost and benefit will limit goods production to those strongly desired by the community, and largely paid for by those who stand to benefit most. The true test of a public good is non - excludability, and while there are some goods which can be placed in this category, these goods are extremely limited. The non - excludability problem becomes more complex as society expands, for goods such as dams and lighthouses are much more likely to exclude some members of society as the community enlarges. Secondly, many people desire the benefits of the public good but are unwilling to pay a proportionate cost of the production. These are the major dilemmas faced in the production of public goods, and the liberal model offers solutions which effectively minimize both.

We must examine the arguments depicted in the island illustration and apply them to larger models within the liberal context. All of the arguments depicted in the island example are illustrative of problems which arise in contemporary political societies. Larry , for example, was challenging the actual social benefit of the I.D.I. and therefore challenging the good as actually being public. Many of the arguments made by the islanders stem from the original contract which stipulated equal cost, generated from the false assumption that all benefited equally. We have already determined that equal cost is an impossible solution because no public good produces completely equal benefits. The arguments contain many issues outside of this problem, however, and all must be solved individually.

Larry is making the false assumption that he is not benefiting from the I.D.I. Larry may not be benefiting from the defense program to the extent of some of the other islanders, but he is receiving some benefit. He is protected from wild animals when he ventures into the community to trade, when he does spend his time at his camp, and he benefits from knowing that his trading partners and their goods will not be annihilated at some point. The true argument in Larry's position is that he does not value the good at the cost it is provided. This raises an interesting dilemma, because not all goods that are non - excludable should be produced. A public good must be desired to be produced, and the most logical answer is to distribute cost to those that desire it most. Those that desire it most are likely to benefit the most from production, leading to the liberal solution of cost internalization.

Cost internalization attempts to ensure that those who benefit most from the good will pay the most for the production. This can be achieved through privatization and de-centralization methods, which will be thoroughly examined at the end of this section. Larry, therefore, does not have a legitimate claim that the good is not a public good, but has a legitimate claim that he is serving as a &quotsucker" for the rest of the community because he is not paying the cost he feels the good is worth. For Larry, the good is being overproduced at his expense because he pays the same cost as those who benefit most.

The second argument arises from Bert, whose claim is interrelated with Larry's. Bert is essentially the opposite side of Larry's argument, for Bert is one of the islanders who highly values the defense system and wants the cost to be evenly distributed to those who do not. Should cost internalization be established, then Bert will likely be the leading laborer in the production of the good. While this is probably not preferable to Bert, it is consistent with proportional cost. Bert is essentially guilty of theft under the liberal framework, for he is using the labor of other individuals for his own gain at a disproportionate benefit to the other islanders. The purpose of the liberal framework is not to produce goods at the lowest possible cost to all members, but to produce the goods at proportionate cost to all members. While &quotfree - riding" will still exist in this framework, it is to a much smaller degree than a blanketed equal cost structure. Bert is essentially arguing to maintain his practice of theft, which is incongruent with the liberal model. Bert, then, has a illegitimate claim.

The issues presented by Bert and Larry have many contemporary parallels, but only one example is needed to illustrate this. The funding for disease research is viewed as a public good in the United States. While it is claimed that all individuals benefit from the research to a certain degree, there are many who benefit much more than others. Women, for example, benefit much more than men in breast cancer research, as do men in prostate cancer research. If these can truly be considered a public good, which is debatable and will be taken up later, the proportionality is certainly skewed if all taxpayers pay the same amount. This is the same issue faced by Bert and Larry, for internalization of cost would have those benefiting most bearing the greatest cost. Solutions for this problem will be examined at the end of this section.

The argument presented by Blake is a new dimension in the public goods discussion. This argument brings forward the issue of negative externalities, which is the violation of individual rights by the actions of an individual or the production of a good. If the islanders' argument is true, then the defense system would be unnecessary if it were not for Blake. This brings the cost question into a whole new realm, for justifiably, Blake should be bearing the entire cost on his own. If Blake is the creation of the problem, then Blake should bear the protection of the community, which enters a new area of liability.

Strict liability is a foundational principle of the classical liberal model, for this promotes and ensures individual responsibility. Strict liability ensures that each individual will be held accountable to the results of his own actions. In Blake's situation, if he is truly causing the problem of the lion attacks due to his actions, then he must be held accountable for them. Blake has a responsibility to correct the situation, either by halting his actions or bearing the cost of the defense system. A public good in the liberal model cannot stem from the actions of an individual, for this would shirk the element of responsibility. The motivating factor for the I.D.I. was safety, which was endangered simply by the actions of Blake. Blake, then, is profiting from his industry at the expense of others, creating a situation in which the other islanders are paying for a portion of Blake's operational costs. Blake's business, of course, is not a public good and can seek no justification for subsidy from the rest of the community.

Once again, there are many contemporary examples which are parallel to Blake's issue. The cleanup of rivers and streams is deemed a public good in the United States due to the non - excludable benefits created by having clean water. The liberal principle of strict liability would likely maintain the benefits of the clean water but force the cost of the burden to those that created the problem. The unclean rivers are the result of pollutants discharged by certain individuals and corporations, and those individuals should be liable for the cleanup cost. Industries refraining from polluting the environment have no obligation to pay for those that do. Polluting industries are essentially profiting from having others pay a portion of the operational expenses of the business. The industries are producing the good at less expense than it actually costs to produce it because they are subsidized by others for their irresponsible behavior. A system of strict liability in the liberal framework would not only force those who created the problem to clean it up, but would discourage further polluting. The current system is inherently flawed, for it is cheaper for the industry to continue dumping with the subsidy than to pay for the hazards they create.

The argument brought forth by Rebecca raises the issue of compensation, for she is bearing much of the economic burden for the defense system. Rebecca feels she is due compensation for the wood she provides to the defense structures. This is actually an illustration of takings, which is an entirely separate area in the public goods argument. If the maintenance of the public goods requires what is privately owned, then compensation must be made to the provider of the materials. Takings without compensation would be theft, which is violation of property rights. Rebecca has a legitimate claim, for she owns the wood and is protected in her right to it by the social contract.

A contemporary example of Rebecca's situation would be the needing of land to place a new military base. Defense is seen as a public good, but private land must be acquire to produce the good. Private property can only be attained through the market process, arriving upon an acceptable price of compensation with the individual who owns it. Forced takings, or eminent domain, can only be invoked when the market process has been completely exhausted. For example, if the base needed to be on the Eastern seaboard, then people owning land in all acceptable areas must receive an offer before eminent domain can be considered. Secondly, if and when eminent domain is enacted, just compensation must be granted the individual. This compensation must take into account more than just the market value of the land, for many other rights are included in the takings. There is no set formula to arrive at just compensation, and the people are overall responsible for ensuring the government does not overstep its bounds and violate the rights of the other individual. Eminent domain is a resort which should rarely need to be invoked, however, for the processes we examine at the end of this section will describe how most individuals in the market process will receive compensation acceptable to them in private contract.

The final argument arose from Jackson, who claimed a negative externality of spillover from the defense system. Jackson has a legitimate claim which is closely associated with the argument presented by Blake, though it is essentially the opposite side of the same coin. Jackson claims a negative externality when his rights are violated by the noise created. Compensation to those violated by the good is a production cost of the good, which means the good is actually being produced at the expense of Jackson.

A contemporary example of the dilemma faced by Jackson is the noise created by airports. The value of land owned by individuals near the airports may decrease when the noise pollution is exceedingly high. Part of the cost of producing the good must include compensation to the individuals, or the good being produced at a greater expense of those who value it less. Prior contracts in which the individuals agreed the benefits they receive from the airport offset the devaluation of land would certainly alleviate compensation, but this is rare. Attempts to secure private contracts prior to airport construction should occur before construction, offering benefits or finding individuals who feel they will benefit greatly from the airport. Compensation after the fact will raise the cost of airport maintenance, for costs must now be added which were not initially planned. The protection of individual rights in the liberal model ensures that benefits for others will not be borne by an individual not benefiting to their degree.