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The economics of Christmas lights

Around and about at the time of year, you will see houses decked out in Christmas lights. These are a wonderful, charming part of Christmas celebrations. And, according to some economists, they shouldn’t exist.

Are lighthouses public goods?

A little while ago I wrote about how lighthouses were a classic example of what economists call ‘public goods’. These are goods or services which are 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). I explained how this was used as an argument for government provision of lighthouses

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.

It sounds right in theory, but, in fact, as the economist Ronald Coase wrote, there is, in fact, a long history of private sector lighthouse provision.

Are Christmas lights public goods?

When you think of our definition of public goods, we’d have to say that the Christmas lights on people’s houses are public goods. They are non-rivalrous – if I look at them that doesn’t reduce the amount there is for you to look at. They are non-excludable – you can look at them whether you have paid for them or not.

Again, the theory would suggest that these lights shouldn’t exist and that, if we want them, government should provide them. But, there they are, with no government money. How come? In the case of lighthouses, the private sector provided them because there was a monetary incentive to do so. But that is not the case with family home Christmas lights. Something else is at work.

Simply put, people don’t just do things for money. Economists generally argue that people act to maximize ‘utility’. All too often, this is taken to mean ‘monetary reward’. But that isn’t what ‘utility’ means. Rather, it means a sort of mental sense of well-being. You might work at a coffee shop for the monetary reward, but you spend that monetary reward on things that bring you this increased sense of mental well-being – utility. To everybody except Ebenezer Scrooge and numismatists, money is only a means to an end and that end is the sense of mental well-being economists call utility. And your utility can be a function of other people’s utility. The people who decorate their houses with Christmas lights get this utility from seeing happy families and children outside their houses.

Economists often don’t help themselves here, and they would do well to make this point more often. Economics is not the study of money but of human behavior. Specifically, it is about how people increase this sense of utility. Money is a large part of that process, but, to repeat, only as a means, not an end. The private sector provided lighthouses because of the monetary incentive to do so. The folks who decorate their houses for Christmas do so because our happiness is their happiness.

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

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