Tuesday, August 2, 2011

This is why I prefer talking about "externalities" rather than "public goods"

Tyler Cowen is getting rightfully bashed for presenting both non-scaled and nominal federal spending projections (apparently his critics aren't satisfied with "but the numbers are from a well known Washington think tank" - go figure).

But this paragraph in his response provides a good example of why I hate references to "public goods" when talking about the appropriate function of government:

"Some MR commentators raise the issue of per capita measures of discretionary spending and whether they will decline. It might be nice to have growing public sector per capita quality with growing population and growing wealth. But if the good in question is a public good (and is it not supposed to be?), adding extra people to the mix, ceteris paribus with no spending boost, is compatible with those additional people getting more or less the same services as the previous consumers. Falling per capita expenditures on public goods, if it is not too big a fall, still means a greater real quantity of public goods enjoyed, given non-rivalry of consumption."

Are there public goods? Sure there are. But there are also lots of normal goods with externalities, and those are the really important ones. Those expenditures also grow with population and the size of the economy.

For the record I also don't like "market failure" although I probably use it somewhat more than the phrase "public good". "Market failure" implies there's something inadequate or bad about what the market is doing under certain circumstances. That seems like a strange way to think about it. It's like saying that the fact that hammers don't bang in screws well implies "hammer failure". I don't think most economists think the market is "bad" when they think about "market failures" but it's still sloppy language and it opens you up to sloppy critics who would rather presume you're insulting the dignity of the market than formulate a real argument.

12 comments:

  1. Everything except masturbation has an externality, Dan. I don't think it's fruitful to talk about externalities when they are omnipresent in every action or exchange. It just seems redundant.

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  2. You clearly haven't been with open-minded enough women Mattheus.

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  3. Seriously, though. What possible relevance could omnipresence have for the question? Presumably it's a matter of how substantial the deviation of the social optimum from the private optimum that matters - not how often there is a deviation.

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  4. Mattheus,

    Remember, the government can finely tune all these externalities for the better of all! ;)

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  5. You clearly haven't been with open-minded enough women Mattheus.

    I know it's a joke, but I really don't get it.

    Presumably it's a matter of how substantial the deviation of the social optimum from the private optimum that matters - not how often there is a deviation.

    I understand, and I agree. But it presents a significant practical hurdle to overcome, even ignoring objections as a matter of principle.

    Remember, the government can finely tune all these externalities for the better of all! ;)

    Like I said, practical hurdles.

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  6. What hurdle, Mattheus?

    Why must this be an on or off switch? Do you just mean there's a hurdle because people might have to exercise a little judgement in determining how to interact with their social environment?

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  7. Mattheus,

    We have to remember that social optimum means stuff someone wants to make other people subsidize for a number of varying goals: (a) for some paternalistic "good of the community" goal; (b) to benefit insiders; (c) to support some "noble cause" that most people don't believe in; etc.

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  8. gary, i don't think that is at all what daniel is trying to say here.

    daniel, maybe you could provide some examples of what goods you are talking about?

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  9. It's not what I'm saying anonymous, and Gary knows this and Gary has ample material to draw on when he decides to stop putting words in my mouth. I'm going to try to stop adding fuel to the fire so much - we'll see how that goes.

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  10. Daniel,

    I'm not putting words in your mouth; I'm just arguing that beyond all the fine hypotheses regarding what the "social optimum" means in reality those are the places it ends up landing.

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  11. Gary as we often discover, you have no clue what you're talking about.

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  12. Daniel,

    Oooh burn. I feel so insulted. Whatever will I do with myself? *rofl*

    The whole discipline of public choice is based in part exactly on the sort of observation I just made.

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