Economist Writing Every Day

Bryan Caplan recently wrote about public goods theory, how we teach it, and the unrealistic nature of how we classify goods as either/or, rather than on a continuum. I explored similar themes in a blog post that I wrote back in January, but Caplan brings up another important point about public goods theory that I forget.

In a short 2002 paper, and then in a 2003 book with the same title, Foldvary and Klein proposed the idea of “the half-life of policy rationales.” In brief, the justification for many market failure arguments is contingent on the current state of technology. They apply this to concepts such as natural monopoly and information asymmetries, but for public goods theory the most important application is to the concept of excludability.

Here’s the basic idea: it is costly to exclude non-payers for using some goods. If it is so costly that it would not be profitable for a private enterprise to produce the good in question, it won’t be produced privately. But it still may be efficient for government to produce the good, if the benefit from the good exceeds the cost of raising the revenue to pay for it (likely out of general revenue, since we have already admitted it is infeasible to charge the users directly).

But here’s the Foldvary and Klein point: all of the above paragraph is dependent on the current state of technology! Take roads for example. When you had to pay someone to physically take a few coins for a toll road, plus force all motorists to slow down to a complete stop to pay the toll, it was probably cost prohibitive to operate limited-access private toll roads. But technology changes. We now have the technology for electronic tolling done at highway speed (and even coin buckets were slightly faster than handing some dude your change). The argument for government provision of highways, which was strong when technology was ancient, is significantly weakened now that technology has reached its modern state.

(There may be lots of other reasons you think that roads should be publicly provided, such as equity, but these are separate questions and distinct from the argument made in standard public goods theory.)

Foldvary and Klein go through many more examples in their book, but we can already see the key insight. And I think this is extremely important for teaching public goods to undergraduates. It’s normal for us to say that goods are either excludable (in which private provision is best) or non-excludable (in which there is a strong case for some government intervention). But this either/or framing is wrong (a continuum is a better way to think about it), and crucially it can change over time depending on technological changes. Excludability is not some inherent feature of a good or service, it is a function of the state of technology.