I will admit that I usually have the TV on when I am working- yes, I realize that this isn’t the most efficient thing to do, but it gives me things to write about, so I think it’s a fair tradeoff. In this case, the thing that caught my eye was the following commercial:
What Rachel initially seems to be describing is what economists call either a public good or a common resource. The notable feature of these goods is that their use is not limited to paying customers (i.e. not “excludable”, in economic terms), in which case her argument makes sense. Unless a good that is not restricted to paying customers is attached as a loss leader to some good that is expected to be profitable, producing the good isn’t a very good business model for a private enterprise, even if it would be good for society as a whole. Think about it- if you, as a customer, could sit around and wait for other people to pay for something so that you could use it for free, wouldn’t you? The problem is that so would everyone else, so that thing would never end up getting produced. Economists call this the free-rider problem. In reality, people are more altruistic than economists generally assume, so they tend to contribute more than zero to public goods (public television, anyone?), but usually not enough to achieve the level of production that is best for society.
If producing a public good would be socially beneficial, then it can make sense for the government to step in and coordinate the funding of such a project. But is that what is going on here?
My internet research tells me that Rachel is at the Hoover Dam, and the shot in question is of one of the newly-constructed bypass road. (In fact, I believe that the structure in question is the Mike O’Callaghan – Pat Tillman Memorial Bridge. Also, the commercials were shot by Spike Lee, in case you were curious. I’m nothing if not a researcher.) Whether we’re talking about the bridge itself or the dam in general, the same question remains: could access be restricted to paying customers, thereby giving private enterprise an incentive to build such a structure?
Making the bridge excludable would be pretty straightforward- just install a toll booth. (Update: See the comment below regarding excludable bridges, because it’s awesome.) As for the dam itself, isn’t the main point of the dam to provide power to paying customers? From wikipedia:
Power from the dam’s powerhouse was originally sold pursuant to a fifty-year contract which terminated in 1987. When the contracts ended, the Bureau of Reclamation assumed control of the powerplant from the Los Angeles Department of Water and Power and Southern California Edison Co. The contracts were renegotiated and implemented for a 30-year period, and will expire in 2017.
How, then, is the Hoover Dam’s output not excludable? It is, in fact, restricted to the 15 paying customers that are included in the contract. Could these organizations not have banded together to finance the building of the dam in the first place?
I get it- it’s hard for companies to coordinate. It’s also possible that the cost of the dam is effectively subsidized by the government, despite the fact that the output isn’t free. It’s also the case that the Hoover Dam was built during the depression, when private enterprise was suffering from lack of credit availability and irrational skittishness about investment. But it’s nonetheless a fallacy in general to basically say “hey, this thing is big, so it has to be provided by the government.” I mean, look at Google. 
There is, however, another argument to be made for the involvement of government in projects such as the Hoover Dam. If the dam provides positive side effects, or externalities, to those not involved in the production or consumption of the dam itself, then it can make sense for the government to subsidize these projects to the degree that they provide these third-party benefits. That said, a subsidy would be more like “hey guys, we’re going to throw a few bucks your way to get this thing built so that citizens can benefit from it as well,” not “oh here, allow us to build this thing for you.” Apparently, the dam provides flood control, irrigation water, and a tourist attraction in addition to hydroelectric power, so it’s not hard to see that positive externalities may be present. Also, I heard that hydroelectric power is good for the environment or something, so there’s that too.
If you want to learn more about public goods, check out my brand-spanking new (and not yet complete) about.com site here.
31 responses so far ↓
1 Roland Martinez // Jun 24, 2011 at 5:18 pm
Government regulations already in place could stop big projects. A dam could have externalities that are both positive and negative. For example the dam caused positive externalities for Las Vegas by making water available while depriving those benefits to Los Angeles. No private company could have dealt with the regulatory issues of building the dam.
2 Russ Nelson // Jun 24, 2011 at 5:22 pm
It’s great that she understands the concept of a public good, but she sabotages her explanation by pointing at a bridge, which is the ORIGINAL excludable good. You know why the immigrants to the US could be persuaded to invest in the Brooklyn Bridge? Not because they were foolish, which is the current understanding of “If you (insert idea you wish to show is obviously false) then I’ve got a bridge in lower manhattan you can buy.” Because that’s the traditional way to build a bridge: get together some investors, build a bridge, and charge a toll.
All of that said, Rachel is glossing over the fact that good government is the ultimate public good. Have trouble getting together investors to build your bridge? Just get together politicians to vote for your bridge. How is that any easier? I’m not seeing the magic wand that Rachel promises us. “Just let the government do it, and you don’t have to worry about whether anybody actually wants it badly enough to pay for it.” is what I hear her saying.
3 econgirl // Jun 24, 2011 at 5:27 pm
@ Roland: Why not? Private companies deal with regulatory issues all the time.
4 econgirl // Jun 24, 2011 at 5:34 pm
@ Russ: I did not know this, and I love it. I think an important point to keep in mind is that a lot of goods can be either excludable or non-excludable by construction, and that decision is somewhat of a value judgment. It’s certainly possible to have a private bridge, in which case only those who can afford the toll can use it, but there is also an argument to be made that, as a matter of principle rather than of economics, having access to the bridge is a basic right that shouldn’t be denied to anyone, in which case the government has to provide the bridge.
Now, just for fun, replace bridge with health care in the above paragraph.
5 Roland Martinez // Jun 24, 2011 at 5:47 pm
Sure they do:
http://www.economist.com/node/18712862
Often times by going out of business. Can you name a time where a non-government entity completed a project that had as many multijurisdictional effects as the Hoover Dam did?
6 Kurt // Jun 24, 2011 at 5:51 pm
>> there is also an argument to be made that, as a matter of principle rather than of economics, having access to the bridge is a basic right that shouldn’t be denied to anyone
Nothing is a basic right if someone else has to provide it for you.
7 Roland Martinez // Jun 24, 2011 at 5:57 pm
By the way I love your blog, I never knew you had one until today. I am absolutely subscribing!
8 Kurt // Jun 24, 2011 at 5:58 pm
>> there is also an argument to be made that, as a matter of principle rather than of economics, having access to the bridge is a basic right that shouldn’t be denied to anyone
Why is it that people always claim rights to things after they exist? If the bridge didn’t exist would you have a “right” to one?
Health insurance has been deemed a “necessity” by many people, along with air conditioning, indoor plumbing, refrigeration, a well-balanced diet, etc. Trouble is, if these are “rights” because of need how did people do without them for thousands of years before these things existed? If these are rights because of “need,” doesn’t that mean that Joe Blow back in 1900 had a right to air conditioning? I hope that even a communist can see a slight problem with that.
9 noiselull // Jun 24, 2011 at 6:02 pm
Walter Block in The Privatization of Roads and Highways mises.org) takes this argument to task better than I can.
10 noiselull // Jun 24, 2011 at 6:03 pm
Correction:
mises.org
11 noiselull // Jun 24, 2011 at 6:03 pm
http://mises.org/books/roads_web.pdf
12 Roland Martinez // Jun 24, 2011 at 6:18 pm
Kurt, if you’re willing to be the guy who has a standard of living and lifespan of someone in the 19th century then I’m all for it.
If you want to foist it on someone else because of your poorly thought out policies then I start to get all activist on you.
13 anon // Jun 24, 2011 at 7:14 pm
Econgirl is correct that building a purely private bridge may be feasible. However, it is not necessarily a good idea, because while a bridge may be excludable it is to a significant extent non-rival. Stated a different way, the marginal social cost of a vehicle crossing the bridge is indistinguishable from zero. The cost of building the bridge is a one-time fixed cost.
Given this, it’s not efficient to charge tolls for the bridge, even if a private entrepreneur would need to do so in order to defray its cost. If prospective users can collectively defray the bridge’s cost through government action or private charity, this may well be a more efficient outcome.
Note that, in theory, a profit-seeking entrepreneur can achieve a better outcome by charging a one-time subscription to users who wish to cross the bridge and allowing unlimited access to such users: this is known as a two-part tariff. However, it is not at all clear that such a pricing scheme is feasible: it depends on the underlying technology.
14 econgirl // Jun 24, 2011 at 8:20 pm
2 points:
1. I never thought I would be defending Kurt up there, but here goes: there is a difference between committing everyone to a 19th century standard of living and making a 19th century standard of living the minimum guaranteed level of existence in a society. He seems to be advocating for the latter.
2. anon, you totally clicked on the public goods link, didn’t you.
It’s true that a non-zero price for a good that is non-rival is inefficient, but taxes are also inefficient in the vast majority of cases, and the money’s got to come from somewhere. I’m not saying that you did it, because you didn’t, but, in general, it’s way too easy to forget about the costs (i.e. deadweight loss) of taxation.
15 Roland Martinez // Jun 24, 2011 at 10:55 pm
Yes I must apologize to Kurt. I got far afield there.
16 Russell Nelson // Jun 25, 2011 at 12:50 am
Anon, if you think that a bridge has no costs once built, I own stock in a bridge in lower manhattan that I could be persuaded to part with.
Do you realize that your argument, if true, eliminates any justification for protection of intellectual property?
Roland, look at your favorite type of linear infrastructure if you want to see jurisdictional difficulties, and yet … we have many forms of linear infrastructure (pipes, roads, and cables).
17 Russell Nelson // Jun 25, 2011 at 12:58 am
econgirl, what do you do when access to the bridge is a basic right, and somebody uses that right to drive a hundred 18-wheelers over the bridge every day? Or they drive overweight trucks over the bridge?
There are many other business models for providing general access to the bridge short of government building of the bridge. The government could buy a bridge pass for deserving people. Or the owners of the bridge could recognize that some people could make good use of the bridge but could never pay for it, and perform some sort of price differentiation. Perhaps limited times of the day, or use of only certain lanes?
18 anon // Jun 25, 2011 at 10:23 am
Russell Nelson, OK, let’s consider bridge maintenance as well. If the cost of maintaining the bridge increases with rising traffic, then yes, vehicles crossing the bridge impose a cost. But that cost may be negligible compared to the expense of building the bridge and performing baseline maintenance.
Re: intellectual property, we are firmly in the land of second best here: there is no rigorously optimal policy. Generally speaking, all governments restrict intellectual property grants to a limited time-span (at least re: copyright and patent rights) and many governments directly subsidize production of a variety of intangible goods. Similarly, charging user fees for crossing a bridge may well be justified in some cases, but it is not without drawbacks.
Yes, various models exist which can lessen the excess burden of charging fees for a zero-MC resource. I pointed one out in my previous comment.
19 Punditus Maximus // Jun 26, 2011 at 12:06 am
The thing you have to understand is that the fact that a private bridge exists magically makes it not a monopoly, so there are no costs to society associated with private ownership. And, of course, public ownership, or even a public right of personal transit, magically translates into a right to an infinite amount of use, even unto preventing others from exercising their rights. Indeed, no system of balancing the rights of multiple persons has ever been invented, which is why libertarianism is a philosophy which not only completely applies to the real world, but also has extensive historical precedent.
Anyways, are there non-trivial private dams? Because it’s not that private entities are incapable of building large items; the largest building in the world is still Boeing’s plant in Everitt, WA. It’s that the sheer number of private landowners that dams have to displace means that the only entity capable of building them is one which has eminent domain. Coase’s Theorem, and all that. So it’s not a choice between public and private dams — it’s a choice between public dams and no dams. It can, therefore, be truly said that libertarians are incapable of giving a dam.
20 Punditus Maximus // Jun 26, 2011 at 12:07 am
Also, this post is a bit of an exercise in sophistry, no? Obviously, in lay parlance, goods provided by the government (the public) are referred to as public goods. Indeed, the confusion this term engenders speaks poorly of the economics profession’s ability to choose terminology more than anything else.
21 Punditus Maximus // Jun 26, 2011 at 12:12 am
There is no such thing as first-best if we take time into account. Marshallian economics requires a tatonnement auctioneer and never discusses insurance, risk, or changes in technology. First-best is the domain of lousy mathematicians and those who find the real world far too complicated to interact with.
22 Russell Nelson // Jun 26, 2011 at 12:20 am
Pundy: if you think “public good” is bad, try “rent-seeking”. I would guess that Brookstone Power’s dams (originally Niagara Mohawk) were built using eminent domain. They’re privately owned and non-trivial.
23 Punditus Maximus // Jun 26, 2011 at 12:28 am
Yes, “rent-seeking” is a lousy terminology, but “economic rents,” on which the terminology is based, vaguely makes sense. There’s no such excuse for “public goods,” which have nothing to do with “the public.” They’re simply non-rival and non-excludable. They’re no more or less “public” than their rival buddies, the (far better named) common resources.
24 hamburglar // Jun 27, 2011 at 6:15 pm
@Punditus Maximus
If you’re trying to provide an example of private industry completing a massive construction project without the help of the govt, you might be hurting your case by citing Boeing – the world’s 3rd largest govt defense/aerospace contractor.
25 Joshua // Jun 27, 2011 at 7:26 pm
Not so fast; you assume that the power generated can be restricted to paying customers, but there are many, many free riders getting electricity. Just ask my kids.
You also make a claim about hydropower being environmentally friendly, but it ain’t always so: it may generate with little carbon footprint (maybe), but carbon emissions aren’t the be-all and end-all of environmental goodness. In addition, big hydro. like Hoover don’t even qualify for carbon credits, due to their environmental impacts that include such a tremendous re-jiggering of watersheds that we really don’t know their ultimate carbon impacts.
Otherwise, good stuff.
26 Punditus Maximus // Jun 28, 2011 at 5:55 pm
@Hamburglar: I never claimed that a large industry would not interact with the government; that seems impossible, given the inherent nature of externalities and property issues. What I claimed is that it is perfectly possible for an essentially private entity to construct large structures, but nearly impossible for one of those structures to be a dam. Also, I made myself laugh at the libertarian funny, which is key to my long-term health prospects as our society lurches toward oligarchy.
27 Devon // Jul 5, 2011 at 10:29 am
Apparently in Canada somewhere there is this one super efficient privately owned toll road. Don’t know much of the history, or if eminent domain was used to buy the land or anything like that, but it seems private investors are in fact completely capable of making and maintaining highways…so a bridge seems pretty plausible. Especially if they could charge a toll for it.
28 Devon // Jul 5, 2011 at 10:30 am
Sorry, forgot the link to the aforementioned Canadian http://www5.407etr.com/tolls/tolls-explained.html
29 Xerographica // Nov 7, 2011 at 9:36 pm
Econgirl!..? The very first thing that should have popped into your mind when you saw these commercials was “opportunity cost”. What other public goods did we have to forgo in order to pay for those public goods?
It should go without saying that every single public good has a different Return on Investment. It’s also a given that every single person values every single public good differently. How can planners guarantee that a public expenditure is the best possible use of public funds? They can’t.
If planners could guarantee the best possible use of public funds then they would also be able to guarantee the best use of private funds. Planned economies have always failed though. They fail because the essential element of “choice” was taken away from consumers.
The only way to guarantee the best possible use of public funds is if each and every taxpayer were allowed to directly allocate their individual taxes among the various government organizations. This would force taxpayers to consider the opportunity costs of their spending decisions. The result would be the efficient allocation of public resources.
This concept is known as pragmatarianism.
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