Thursday, July 28, 2005

More on the spectrum of "public good"

Posted by Craig Westover | 1:40 PM |  

King Banaian responds to my question about the existence of “public goods” with a brilliant economic analysis -- it contains Latin and a graph. And -- ceteris paribus -- King is as I usually find him to be, more right than wrong: “The decision to provide some goods collectively because ‘market failure’ would lead to non-optimal provision of the goods cannot be decided a priori.” Unfortunately, I do not think we are dealing with a situation where “all things are equal.”

In my post I suggested some criteria legislators might use to determine if an action represented a “public good.” King follows economist James Buchanan in belief that the question of public good is not a question about problem characteristics (which I make it), but a broad comparison of institutional alternatives; that in making judgments, we must compare “market failure” to “government failure” in terms of efficiency, a scenario where government efficiency virtually always loses. As King notes --
We do so because the optimal amount [of a good] is closer met (at lower cost) by private market decision making than collective decision making. . . .Wouldn't that be the right way to handle the question of what is a "public health" problem, rather than the list of problem characteristics Craig offers? [Bracket added for clarity.]
There is a old joke about a physicist, a chemist and an economist stranded on the deserted island with no supplies except a carton of canned beans. The physicist and the chemist develop a plan for using the sun’s rays to heat a can of beans to a temperature such that the structure of the can is weakened to a point where the top will loosen and can be pried off. The economist also puts together a plan. His plan begins “Assume that we have a can opener….”

I’m convinced the King is correct, but “King’s can opener” is that he assumes his argument will also convince the likes of state-wide smoking ban sponsors Ron Latz and Doug Meslow, new urbanists that live and breathe for light rail and legislators that never saw bonding for a stadium, a civic center or a par-three golf course that wasn’t a great investment. Until those folks see the light, I’ll stick to a problem characteristic approach -- at least to a point.

In an email to me, King correctly notes that there is both an economic and political aspect to this discussion. In our initial posts on this subject, I think King and I staked out positions in our respective areas of interest -- King makes a correct economic argument, while I take a political route. Given the insights in King’s post, however, I believe our two positions can be resolved into a cohesive approach to a (gasp) policy.

Allow me borrow from the Italian economist Vilfredo Pareto, who gave us the oft-quoted 80/20 rule, as in “80 percent of the wealth is controlled by 20 percent of the people.” In business management terms “Pareto Analysis” means identifying the “vital few” from the “trivial many.” For example, 20 percent of product problems cause 80 percent of customer complaints. A good manager will attack the 20 percent “vital few“ first, even if there are low-hanging fruit problems to solve among the “trivial many.”

Applying Pareto Analysis to the question of government spending on “public goods” (or creating public health regulation), must-pass criteria will eliminate the vast majority of supposed public good proposals before they get legislative legs. A product characteristic approach (legislation is the “product“) puts the burden of proof on the sponsor of legislation to show why/how the legislation is a “public good” rather than (as is currently the case) making the burden of proof fall on those that oppose legislation to show why it is bad. A product characteristic approach requiring criteria for a public good eliminates a lot of legislation right out of the gate.

However, King’s point is well taken, and once a piece of legislation has passed my criteria test -- or something similar -- it ought to be subjected to King’s economic efficiency test. Although a piece of legislation might meet criteria as a “public good,” it may be more efficient to leave resolution to the private sector.

King believes “the argument over the alternatives isn't about the characteristics of goods, but the choice of institutions.” I would agree, but in the practical world of legislation, a method is needed to determine what actions one is going to consider. The method is found in creating criteria for a “public good,” and insisting they be observed.