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Privatization and Decentralization - Risk and Takings

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

Jarrett L. Hale
Graduate, Belmont University, 1999
Nashville, TN
Privatization and Decentralization

Internalization of cost is intended to produce the proportionality of cost in a liberal framework. As explained previously, the internalization ensures that those benefiting will be the ones bearing the cost. The issue of public goods, however, poses a dilemma because all members benefit to some degree and debate is centered around how much benefit each member is truly receiving. I have already mentioned that the "free - riding" problem is present in all public goods situations, but the objective of the liberal model concerning public goods is to minimize this to the greatest degree possible. We will now explore possible options available to the liberal framework which can serve to make cost and benefits more proportional, though not perfect. The foundation of individual rights, coupled with strict liability, allows several avenues of exploration in the liberal framework.

I have already discussed strict liability to a large degree, but the understanding of this principle is crucial to the functioning of a liberal framework. The principle of strict liability ensures that those creating the problem will pay the cost of eliminating it. A public good can only come about through positive benefit means, which means that public goods created to offset the negative impact created by individuals and corporations cannot be considered a legitimate public good. The benefits of offsetting the negative externality must be paid by those responsible for the initial problem, which is strict liability.

The principle of strict liability eliminates many problems, such as the environmental issues we discussed previously, but many dilemmas still remain. What about the production of actual public goods, and what goods can actually be perceived as public? The conditions of a public good have already been presented, but determining whether or not all members benefit to some degree is a difficult process. The best option to solve this dilemma is a method of privatization and de - centralization, which provides for all non - public goods to be produced through private contract, and all public goods to be produced with a minimal amount of state involvement.

Privatization and de - centralization have often been used as interchangeable terms, but this is not an accurate definition. Privatization encourages a greater amount of competition between suppliers, while de - centralization ensures those competitors are there for the public to choose from (Mitchell, 1994). Public schools, for example, could be both privatized and de - centralized while still producing a public good. Privatization of the schools would result in competition between the schools to draw the best students, while de - centralization would take the money formerly spent on the schools and give them in the form of vouchers so the students could choose the school of their choice.

The purpose of employing both privatization and de - centralization is important because public goods must be viewed from both the public and private levels. To use the school issue, for example, the funding for an educated populace is deemed a public good because all societal members from educated citizens. The actual consumption of the education, however, must be viewed as a private good which allows individuals the same available choices as any other private good (Mitchell, 1994). This separation in classification of goods allows for a greater variety of choice on the part of the consumer while still maintaining the benefits of the public good. Centralized good production is prone to over - production and producing results undesired by the community. Situations in which the public good involves the rights of individuals require an element of choice.

The issue of defense is a good example to use to illustrate this point, as well. Everyone benefits in some way from defense, but the actual consumption of those benefits is a private good. The mixture of both of these elements requires that the market system be employed to a degree since private goods are at issue. While providing for defense is a public good, the actual collection of the funds is the extent of the public good, for everything beyond the collection becomes private consumption. De - centralization would require defense contractors to compete with one another and make public bids to the individuals in society so they may choose how they want the funds collected to be spent. Defense contractors would essentially claim they could produce acceptable defense systems for a certain dollar amount, which would be challenged by other contractors. Individuals in society would determine which system they would like to consume at the private level. Once this is complete, the actual collection of these funds, which is a public good, would begin with the cost of the good being a constant known to the citizenry. Overpriced goods and over - production would essentially be eliminated through a working system of privatization and de - centralization.

The question remains, then, as to how to collect the funds for the public good portion of the project which most resembles proportionality. The simplest form of collection which would help assure this goal is the assurance contract. A key problem in the production of public goods is that people feel they will not receive the benefits they pay for. The assurance contract is a money - back guarantee which enables individuals to retrieve contributions if the funds needed to produce the stated benefits are not adequately met (Schmidtz, 1991).

An assurance contract attempts to meet proportionality by generating funds much like a telethon draws funds for charity. A good such as defense would receive bids from privatized contractors who would claim to provide the goods at certain costs. Once the production costs have been decided through the market process, generation of funds begins. If the defense is to cost ten million dollars annually, then individuals would be asked to anonymously pledge the amount they are willing to pay for the good. If the ten million dollars is not reached, the pledges are returned to the pledgers, and the production cannot be started until the cost ascertained through the market system is matched by funding. This structure may take several attempts before the good begins production, but it reflects the true desire individuals have for the good. Those benefiting most will probably pledge most, and vice - versa. If the goal is not reached, then the good could be over - priced, unrepresentative of what the public wants, or just undesired by the community at large. New proposals and pledges must be cycled until cost is representative of those desiring the good most and the good is representative of what the people want. (2)

The assurance contract does not limit goods which do not achieve total funding from being produced, but requires the goods to be created on a completely private level by those desiring them. The problem of &quotfree - riding" will obviously still continue to exist to some degree, but the assurance contract minimizes the problem. The assurance contract mixes public goods with private market means to make the production of these goods more representative of the public at large, to minimize over - production, and to maintain the emphasis on individual rights through the maintenance of choice through the market structure.

Risk and Takings

The factor of risk, which has been alluded to frequently in the previous sections, is a complicated dilemma in the liberal framework. Risk becomes extremely confusing because it mainly deals with the potential for harm, rather than harm which has already occurred. At what point do the actions of an individual violate the rights of another based solely on the potentiality for harm? Can society invoke takings in the form of regulation to protect against unacceptable levels of risk ? These questions are extremely complex, for limiting individual liberty to protect the liberty of others becomes a fine line in the liberal model.

In order to understand the risk dilemma, we must view risk as a tangible commodity like money, rather than an abstract idea. Just as individuals not benefiting from a good cannot be expected to bear the cost of its production, the actions of an individual cannot create unacceptable amounts of risk to the rights of others. When the actions of an individual create potential danger to the rights of others, steps must be taken to alleviate the risk. These actions usually culminate into takings in the form of regulation.

To illustrate the issue, suppose an individual in a small community owns a vicious breed of dog, such as a pit bull. The individual allows the dog to run free, but insists the dog will remain on his own property because it is well trained. The other individuals in the community, however, fear that the dog may eventually attack one of them or their children, as has happened in the past with that breed of dog. The safety of the community is now endangered and risk is imposed to them. The owner of the pit bull claims he has an individual property right to own the dog, while the community claims he has no right to the dog because he is imposing unacceptable and unwanted risk to their right of property.

While this is a simple example, it promotes a seemingly unanswerable dilemma in a framework which supports individual rights. The answer, however, is equally complex, for both of the parties are correct in their assertions. To completely agree with either party would be to alleviate the rights of the other, which is incompatible with the model. The answer lies in using regulation as a balancing tool which brings the rights of each into equilibrium.

Past history shows that pit bulls are prone to aggressive behavior, sometimes seriously injuring those who are attacked. Because of this, the community is correct in the assertion that the dog presents unacceptable risk to their rights. The owner, however, is also correct, for the right to privately own the dog must be considered a property right which cannot be stripped from him. The real issue, then, is not the owning of the dog, but the circumstances surrounding how it is kept.

The community is unable to regulate the owning of a dog, for merely owning a dog does not present unacceptable risk. The risk is created by the owner allowing the dog to run free, for it is the freedom of the dog to roam which is the actual risk. There is no risk in a pit bull, per se, but there is in one that runs loose. The regulation, then, should be levied at how the dog is kept. These regulations, however, must be created in minimal scope to ensure that a balance is maintained in the protection of rights for both parties. A seemingly simple solution would be to regulate owners of pit bulls to construct a fence the dog cannot jump over, allowing the community to eliminate the risk and the owner to own the dog. The owner, not the community, must bear the cost of the fence, for the risk is the result of his actions.

Regulation is not a violation of individual rights but an essential tool in the liberal model used to protect such rights. This only remains true, however, when regulation is used to balance the rights of parties, rather than completely abolish them. Care must be taken to ensure that regulation is limited to the risk actually imposed. Broad regulation will invariably strip individuals of their rights, while limited regulation aimed at the particular problem will effectively retain the rights of all.

Proper regulation can only be imposed by those bearing the risk, for they are the ones whose rights are violated. A community hundreds of miles from the pit bull problem, for instance, has no vested interest in such an issue until such risk is actually levied against them. Localization is an important part of limited and proper regulation, for proper regulation in one community may be a direct violation of rights in another. For example, the small community can regulate that a fence be built to contain the dog and eliminate risk, for their rights are violated by the dog running free. Suppose, however, that a community hundreds of miles away lives in a rural area where people live on huge parcels of land. Dogs running loose in this rural environment may not impose risk to the citizens to the same degree as the small community. Broad regulation, then, would result in a violation of the rights of those in the rural town, for the regulation would impose cost to eliminate a risk that does not exist. It is for this reason that regulation must be imposed on the most local level possible, ensuring that only those creating and affected by the risk are involved.

One important element of risk that must be mentioned is its relativity. While potential danger related to some activities may be the same in all communities, the perceived worth of such risk, is not. A community willing to accept risk is under no obligation to regulate it. For example, one community may feel the presence of a nuclear power plant creates too much risk to the community, and create regulations which make the elimination of such risk so costly that the plant cannot be built. Another community may desire the economic benefits of the plant and determine the risk is acceptable, thereby allowing the plant to operate with less stringent regulation. While the potential danger is the same, the perceived benefit is different. This results in a privatization of risk, allowing each community to spend its risk for desired benefits, much like it would any hard currency.

As mentioned in the above example, some regulation may result in the total elimination of certain activity altogether. This is not necessarily a violation of rights, however, for some actions may create so much risk that the elimination of it is virtually required. For example, if a person wanted to hold chemical warheads on his property, this would result in a high level of risk for the community. The community cannot regulate that chemical warheads not be stored without paying compensation acceptable to the owner, but can regulate that measures be taken to ensure that accidental detonation will not harm others. This would require some extraordinary defensive shield which encompasses the entire property of the warhead owner, if the rights are to be brought into balance. The existence of such a shield is not currently known, so the weapons could not be held on the property. Note, however, that the right to own them was not directly violated, but the means to eliminate risk were such that the balance of rights could not be achieved. The actual source of risk, which is the lack of containment for deployed chemicals, was targeted by the regulation. While the right to own warheads is preserved, the elimination of the risk made such ownership unfeasible at the current time, thereby preserving the rights of both. Should the individual desiring the warheads secure a shield which eliminates the risk, then he is legitimated in his warhead ownership.

The violation of regulation is another extremely important area of risk. Regulation cannot be legitimately broadened due to the violation of standing regulations. For example, if the man stores the warheads without the shield, he has effectively violated the regulation. While he has violated the first - order rights of the community and is subject to punishment, there is no legitimacy in expanding the regulation to deny the ownership of such weapons completely. Regulation can only be aimed at the true source of risk, and violations of that regulation are subject to the principle of strict liability. The community cannot be expected to bear the cost of the actions of one violator. Broadening of the regulation cannot effectively limit the risk beyond what is already controlled by the current regulation, for the breaking of a broader regulation against ownership would not result in lesser risk than the breaking of the current regulation.

One contemporary parallel to this dilemma is the issue of gun control in the United States. There are many advocates who lobby for the elimination of handgun ownership, though this is not the true source of risk. The risk is actually generated by irresponsible use of such weapons. Regulation against irresponsible use is the first option, though the many deaths attributed to handguns show that this is not always sufficient. The next step would be to regulate where the handguns could be carried. People certainly hold the right to disallow the presence of guns on their own property, but a regulation could be passed banning the carrying of such weapons in publicly owned places. This is essentially the extent of how far the regulation can extend in a liberal model, for the owning and storing of handguns on private property poses no risk to the community. Violators of the standing regulation, however, are subject to strict liability and punishment equal to the damage incurred. Once again, sweeping regulation would be invalid, for some communities may desire the protection carrying a handgun promotes, thereby accepting the risk. Regulation of issues such as these can only be legitimately formulated at the local level, for the amount and acceptance of risk varies from one community to the next.

I have sought to explain that regulation, when employed correctly, is not a violation of the liberal model. Proper regulation serves to balance risk and rights, for an imbalance would result in complete violation of the model. Some actions which are claimed to be rights, such as the possession of warheads with no shield, are not rights at all, and are thereby not protected in the liberal model. While individual rights are held supreme, extension of risk to others is not a right.