fbpx

Latest Posts

Home

Facebook

Twitter

Search
About

Who should pay for that lighthouse?

Why do we tax people? Nearly one in every five dollars of income in the United States is taken by the federal government in tax so its a pretty important question. Every once in a while we should reflect on the fundamentals.

Public goods in theory

Probably the most common answer would be ‘To pay for stuff’. But what stuff?

There are what is known as ‘public goods’. In the jargon, these are goods or services which have the characteristics of being both non-rivalrous (my consumption of it does not leave less for you to consume) and non-excludable (if I pay for it it still benefits you whether you pay or not).

The textbook example is the lighthouse. Literally. There was a picture of a lighthouse on the cover of one of my undergrad textbooks, Economics of the Public Sector.

Lets say you have two ships sailing on Lake Superior, the Viking and the Packer. You can even imagine the Viking as a luxurious queen of the waves, and the Packer as a somewhat moth eaten old tug. Either way, the Viking has paid a contribution to a lighthouse construction fund, the Packer has not. But the Packer benefits from the light just as much as the Viking. There is no way the lighthouse can only shine light for the Viking. The beam from the lighthouse is non-excludable. Also, the Packer can see the same beam as the Viking without reducing the amount of light the Viking sees. The beam is also non-rivalrous.

In these circumstances you have what’s known as the ‘free rider’ problem. The Packer benefits from the lighthouse whether it pays for it or not so it is incentivized not to. But so, also, is the Viking and for the same reason. The result is that neither ship pays to build the lighthouse. It doesn’t get built, and ships start sinking.

Here we have an amount of lighthouses which is socially sub-optimal. To remedy this, the theory goes, the government is required to step in and fund the good (or service) out of general taxation.

Public goods go private

In practice, it can often work out differently.

Technology is constantly changing the excludability of various goods and services. For example, sonar does more to keep ships from submerged dangers nowadays than lighthouses do, and the benefits of a sonar device are excludable.*

And the free rider problem may not be as much of a problem as it first appears. Neither the Viking nor the Packer want to sink. While they may be incentivized to free ride, they are also incentivized not to end up at the bottom of Lake Superior. This incentive can lead to cooperation. As economist Ronald Coase wrote, there is, in fact, a long history of private sector lighthouse provision.

The theory of public goods is a common theoretical justification for taxation and government provision. But it’s not the only one. We’ll look at more tomorrow.

John Phelan is an economist at the Center of the American Experiment

* Where something is excludable and non-rivalrous it is known as a ‘club good’.

Comments

Subscribe

Categories

Upcoming Events

  • Morning in Minnesota: St. Cloud

    Location: St. Cloud

    Sign up HERE! Courtyard by Marriott St. Cloud 404 West Saint Germain Street St. Cloud, MN, 56301 Please join Center of the American Experiment on Tuesday, July 21 for breakfast with Center policy fellow and education expert Catrin Wigfall as she explains K-12 education in the state and its persistent disparities despite decades of increased spending. Following her presentation, Catrin will lead a Q&A session. 7:30 AM Check In and Breakfast 8:00 AM Presentation 9:00 AM Conclude   Catrin Wigfall is a Policy Fellow at Center of the American Experiment. She is also the director of EducatedTeachersMN and EmployeeFreedomMN. Catrin’s…

    Register Now
  • Morning in Minnesota: Marshall

    Location: Marshall Golf Club

      Sign up for this event HERE! Please join Center of the American Experiment on Thursday, July 16 at Marshall Golf Club for a breakfast with Center economist, John Phelan, as he discusses Minnesota’s economic future. Following his presentation, John will lead a Q&A session. 7:30 AM Check In and Breakfast 8:00 AM Presentation 9:00 AM Conclude John Phelan is a graduate of Birkbeck College, University of London, where he earned a BSc in Economics, and of the London School of Economics where he earned an MSc. He worked in finance for ten years before becoming a professional economist. He…

    Register Now
  • 2020 Annual Dinner Featuring Sarah Huckabee Sanders- Now in September!

    Location: Minneapolis Convention Center Ballroom 1301 2nd Ave S Minneapolis, MN 55403

    NEW SEPTEMBER DATE: We have made the difficult decision to once again move the date of this event. We will now host our Annual Dinner on Saturday, September 19th. All tickets bought for the April 4th, or June 18th dates are transferrable. We are so sorry for any inconvenience this has caused, but we look forward to seeing you on September 19! Direct any questions to Kathryn Hinderaker (kathryn.hinderaker@americanexperiment.org or 612-428-7005).   American President: The Unorthodox Approach to Politics that Changed the World. Sarah Huckabee Sanders served as White House Press Secretary for President Donald J. Trump from 2017 to…

    Register Now