Hill – Mankiw 9th Edn Chapter 11 – Public Goods and Common Resources
Mankiw, N. G. (2021) Principles of microeconomics (9th ed.)
Principles of economics (9th ed.)
Mason, OH: South-Western Cengage Learning.
Rod Hill
University of New Brunswick, Saint John campus
Saint John, New Brunswick, Canada
email: rhill@unb.ca
Chapter 11 – Public Goods and Common Resources
Here are some things to consider when reading this chapter.
- The claim that efficiency is the rule rather than the exception, reiterated
Mankiw opens the chapter by repeating the claim that the economy can be regarded as consisting of competitive markets that result an efficient allocation of resources. “Most goods in our economy are allocated through markets, in which buyers pay for what they receive and sellers are paid for what they provide. For these goods, prices are the signals that guide the decisions of buyers and sellers, and these decisions lead to an efficient allocation of resources. When goods are available free of charge, however, the market forces that normally allocate the economy’s resources are absent” (p. 209, my emphases). This same message about the equilibrium in a market for a private good resulting in “an efficient allocation of resources” is reiterated later in the chapter (p. 215).
This rhetoric reinforces the impression that externalities, discussed in the previous chapter, are the exception rather than the rule. The claim of the predominance of efficiency in market outcomes, for which no evidence is offered, is plausible because the competitive market is the only type of market that has yet been introduced. At this point, students have no other way of conceptualizing or modelling a market. Imperfectly competitive markets, where firms do not respond to price signals but instead set their own prices, first appear in Chapter 15. In such markets, no general claim for efficiency can be made. But, by that point, the repeated claim that ‘most markets are efficient’ has been hammered home and may be hard to unlearn.
The portrayal of the economy as largely consisting of efficient competitive markets also ignores the importance for resource allocation, production and consumption of nonmarket economic activities that are not subject to competitive market forces. In their nonstandard text, Goodwin et al. (2019) discuss production that takes place within the household and the surrounding community (what they term the ‘core sphere’) and the ‘public purpose sphere’, which consists of the public sector and nonprofit organizations. For the United States in 2016, the core sphere is estimated to account for 21 percent of the value of total economic activity, while the public purpose sphere accounts for 15 percent (2019, p. 55). This leaves 64 percent for the market economy that is the focus of the analysis in standard texts. Even there, the efficiency of resource allocation is crucially dependent on the non-market administrative decisions taken within business firms, which standard theory largely ignores (as noted further in the Commentary on Chapter 14).
- Is the importance of public goods understated?
(i) Public goods examples in Mankiw’s text
Public goods are both non-rival and nonexcludable in consumption (p. 210). These terms were not introduced in the previous chapter on externalities, but it’s clear that a positive externality is a good that has these same characteristics, and so is a public good. Similarly, a negative externality is a public bad. In general, one can think of goods on a spectrum involving different mixes of private and public goods. At one end are purely private goods, involving no externalities. At the other extreme, are pure public goods, with no private good component. In between are goods which are a varying mixture of private and public goods (or public bads).
In common with standard principles texts, Mankiw gives a variety of examples of public goods National defence is the most common example given in textbooks, to which Mankiw adds the funding of basic research.
Unlike standard principles texts, Mankiw offers an argument for poverty reduction as a public good (pp. 213-4). If everyone would prefer to live in a society without poverty, taxes could redistribute income to eliminate poverty and leave everyone better off. But concern about poverty is only an example of concern about the distribution of income more generally. For example, people may care about the degree of inequality of income and consumption in the society in which they live. If so, the distribution of income and of visible consumption are also public goods. Let’s postpone consideration of this until the commentaries on the chapters on income inequality and the theory of consumer choice (Chapters 20 and 21).
Mankiw’s examples of public goods are provided or subsidized by governments. For-profit or non-profit private organizations provide public goods as well, although not necessarily in the efficient amount. Familiar examples are search engines, commercial radio and TV stations, and Wikipedia.
As well, goods provided by the public sector need not be public goods. The public sector provides private goods, such as water and sewage services, which are excludable. Households who fail to pay their water bills can have their service cut off, as hundreds of thousands of low-income American households have experienced.
(ii) Important public goods that go unmentioned
As Brown University’s Louis Putterman points out about introductory texts: “it’s not too difficult to come away with the impression that they constitute a small subset of society’s requirements and can be dealt with as just ‘a few special cases’” (2012, p. 191). Yet the production of all private goods is crucially dependent on society’s public goods. These include its physical infrastructure (e.g. transportation infrastructure) and its social infrastructure.
Social infrastructure includes the laws and regulations establishing and enforcing property rights. Secure property rights and the rule of law are public goods that provide a framework within which production and exchange take place and are facilitated. Putterman (2012, p. 188) gives other examples: environmental, food, drug and workplace safety regulations. Their existence and enforcement permit air of some minimum quality, and certain levels of confidence in the quality of food, pharmaceuticals, and the safety of workplaces. All of these satisfy the basic requirements of public goods: they are non-rival and are nonexcludable.
The textbook account takes for granted that governments will try to produce the optimal amount of public goods given citizens’ preferences. But Putterman also points out that the existence of such reasonably honest and responsive democratic governments cannot be assumed, but requires an explanation (p. 189; see also Putterman 2018). Such governments could not come into existence if people only consider the costs and benefits to themselves when deciding whether to act or not, in the same way that they are assumed to act when deciding whether or not to buy a pair of shoes.
In their book, Economic Origins of Dictatorship and Democracy, Daron Acemoglu and James Robinson explain that “a revolution is a public good in the sense that when it occurs, it changes the entire society and affects all citizens in the same way.” But participating in a revolution (on one side or the other) is costly and no one can be prevented from enjoying the benefits or experiencing the costs should it be successful. Depending upon one’s perspective, a revolution can be a public good or a public bad.
If everyone behaves like Homo economicus, their simple cost-benefit analyses would leave “all citizens prefer[ing] to free-ride on others’ revolutionary activities rather than incurring the costs themselves” (p. 123, Kindle Edition). Similar reasoning applies more generally to collective action to bring about changes in political institutions which redistribute political power between different groups in society.
Yet in many countries people have risked life and limb in the struggle for more democratic institutions. No doubt there were many free riders too, but critical masses have achieved such things as political and civil rights including universal voting rights, fair elections, and organizing rights for workers.
Acemoglu and Robinson note the role of ideology in persuading people to do their part (p. 124). On this theme, American economic historian Douglass North wrote:
If the dominant ideology is designed to get people to conceive of justice as coextensive with the existing rules and, accordingly, to obey them out of a sense of morality, the objective of a successful counter ideology is to convince people not only that the observed injustices are an inherent part of the existing system but also that a just system can come about only by active participation of individuals to alter the system. … [C]asual observation suggests the widespread existence of behavioral patterns by individuals armed with nothing more than moral indignation as a benefit in a cost/benefit calculus. Protest movements, individual actions that incur the likelihood of imprisonment or death, are so common throughout history that they need no citation; they are no less evident in the modern world…” (1981, p. 54).
In recent years, protest movements centred around economic themes have sprung up, such as Occupy Wall Street and Extinction Rebellion. Their members, motivated by moral indignation, seem to believe that “the observed injustices are an inherent part of the existing system”, which therefore needs fundamental change.
Let’s pause for a moment to consider the ideology of the standard economic textbooks, of which Mankiw’s is a good example. Do they encourage students to conceive of economic justice as coextensive with the existing economic system? Are observed injustices (if any are acknowledged) an inherent part of the existing system, which would imply that the system needs to be altered, or are they aberrations which the existing system can rectify?
- The development of cooperation and voluntary contributions to public goods
Mankiw’s text repeatedly raises the issue of the free-rider problem: if people can’t be excluded from enjoying the benefits of a public good, they have an incentive not to contribute to its cost. Combined with one of his 10 principles of economics – “People respond to incentives” (p. 5) – students could conclude that the theory predicts that people will free ride. But students shouldn’t think that it implies that people should free ride or that it’s ‘rational’ to do so. Rationality simply means acting to attain your objectives, whatever they may be. Deciding whether or not to contribute to a public good is more than a matter of weighing dollar costs and benefits to oneself, as shown by the example in the previous section of people’s participation in the struggles for social change.
Social scientists, including economists, have conducted many public goods experiments. These have explored the circumstances in which people either free ride or tend to cooperate and to reciprocate if others offer to cooperate. The experiments typically take the form of games in which the players are given tokens, each representing a certain amount of money. Each player can contribute to the financing of a public good. The more everyone contributes, the greater the benefit everyone enjoys, whether they contributed or not, creating an incentive to free ride.
These experiments have shown that economics students are less likely to cooperate and more likely to free ride than people of other backgrounds. If this is the result of their studying economics, they have made the mistake of assuming that free riding is the smart thing to do. In fact, it can be a poor long-term strategy because in everyday life people interact repeatedly.
When such public goods experiments are repeated many times using the same participants, free riders can find themselves worse off. A sufficient fraction of people is typically willing to ‘punish’ non-cooperators, even at a cost to themselves. By providing this public good, these punishers can get non-cooperators to cooperate. The result is sustained cooperation to everyone’s benefit. These experiments provide some insight into the development and maintenance of cooperative social norms in societies. (For details about these experiments, see Putterman 2012, Ch. 6; on economics students compared with others, see Häring and Douglas 2012, p. 38).
- Common Resources and the ‘Tragedy of the Commons’ – an omitted viewpoint
Mankiw tells a parable of “life in a small medieval town”. Its central point: each farmer’s sheep impose a negative externality on other farmers, whose sheep will have less grass to eat on the common land. Each farmer, assumed to be narrowly self-interested, ignores the externality imposed on others. Together, they overgraze the commons until it becomes barren. If the commonly held land were enclosed into separate privately-owned plots, the externality would be ‘internalized’ and farmers would have an incentive not to overgrazed their own plots.
Rather than taking this literally, it’s best interpreted an attempt to illustrate a universal problem and to suggest solutions: government regulation or privatization of common resources. Yet this story misses the fact that communities around the world have typically devised ways to successfully manage their local common access resources such as grazing lands, forests, wildlife, inshore fisheries and irrigation systems. Elinor Ostrom, an American political scientist who received the 2009 Nobel Memorial Prize in Economics, wrote: “When local users feel a sense of ownership and dependence on a local resource, many of them invest intensively in designing and implementing ingenious local institutions – some of which are sustained for centuries” (2005, p. 258).
Such an outcome is incompatible with narrowly self-interested people, such as Mankiw’s farmers. It is implicitly assumed that people have no capacity for nonmarket cooperation, aside from obeying the law, and then only if it pays them to do so. Policy conclusions are drawn accordingly, but the validity of the conclusions depends on the assumptions on which they rest.
In fact, people do have a capacity for nonmarket cooperation. Most people are willing to reciprocate if others offer to cooperate. As the public goods experiments described in the previous section also found, if others don’t cooperate, many are willing to punish them. This can result in lasting cooperation and an outcome better for everyone compared with the ‘tragedy of the commons.’
Ostrom saw the textbook story as advocating reliance on professional planners while denigrating ordinary people’s ability to come up with institutions that address their collective action problems in a better way than the planners could. The assumption that short-term selfish actions are the norm “basically says that it is okay to be narrowly self-interested and to wait for externally imposed inducements or sanctions before voluntarily contributing to collective action.” It also destroys “the capacity of citizens to experiment with the diverse ways of coping with multiple problems and to learn from this experimentation over time. … Citizens are viewed as having little to contribute to the design of public policies” (Ostrom 2005, p. 270). The message: leave it to the experts.
Ostrom explains that this leaves no role for norms of trust and reciprocity, knowledge of local circumstances, discussing ethical issues with others, and experimentation to design effective institutions. It’s “a waste of human and material resources and presents a serious challenge to the sustainability of democratic institutions over time” (2005, p. 270). But trust and reciprocity are not characteristics of the decision-makers described in the textbooks. There, there is no community, only individuals looking out for themselves.
- How important is excessive exploitation of common resources?
Mankiw writes: “Just as excessive grazing can destroy the Town Common, excessive fishing and whaling can destroy commercially valuable marine populations. Oceans remain one of the least regulated common resources. Two problems prevent an easy solution.” Many countries are involved so negotiation is difficult and “because the oceans are so vast, enforcing any agreement is difficult” (p. 219), particularly given the absence of any international institution with the power to monitor activities and to sanction violators.
As with the discussion of externalities in the previous chapter, almost no information is given about what is actually happening. Are marine populations being destroyed by excessive fishing, or is this just something that could occur?
In fact, students should be alarmed by the current situation and its causes. A study of fisheries worldwide found the typical fishery to be “in poor health (overfished, with further overfishing occurring)”, “business-as-usual scenario projects further divergence and continued collapse for many of the world’s fisheries.” By 2050, 88 percent of stocks would be overfished (Costello et al. 2016, p. 5125).
The collapse of fisheries is just one element of the ongoing “rampant destruction of ecosystems and wildlife crucial to human civilization” (as one reporter puts it). Aware of this, government representatives will meet in Montréal in December 2022 to try to negotiate an international agreement under the auspices of the UN Convention on Biological Diversity. The goal will be to agree on objectives to be met in the coming decades. A 2021 draft of the agreement includes targets such as the protection of 30 percent of land globally and 30 percent of all sea areas, reductions in public subsidies for destructive industries such as fishing, according to this report. These objectives will undoubtedly be opposed by the industries who profit by externalizing the costs of the destruction.
In June 2022, negotiations among the 164 members of the World Trade Organization (WTO) finally reached an agreement to reduce some subsidies that encourage overfishing. “The agreement creates a global framework that limits subsidies for illegal, unreported and unregulated (IUU) fishing, for fishing over-depleted populations, and for vessels fishing on the unregulated high seas” where no country has legal jurisdiction. Unfortunately, according to many observers, loopholes permit continuing large subsidies, while practical problems of enforcement remain (McVeigh 2022).
Today’s economics students also have a lot at stake in the outcome of attempts to sustainably manage common resources. Why not take a few paragraphs to set out some facts about the state of the world’s common access resources and what might be done about it?
References
Acemoglu, Daron and James Robinson (2006) Economic Origins of Dictatorship and Democracy, Cambridge University Press.
Costello, C., D. Ovandoa, T. Clavellea et al. (2016) ‘Global fishery prospects under contrasting management regimes’, Proceedings of the National Academy of Sciences, 113(18): 5125–9.
Goodwin, Neva, Jonathan M. Harris, Julie A. Nelson, Pratistha Joshi Rajkarnikar, Brian Roach, and Mariano Torras (2019) Microeconomics in Context, Routledge.
Hāring, Norbert, and Niall Douglas (2012) Economists and the Powerful: Convenient Theories, Distorted Facts, Ample Rewards, Anthem Press.
McVeigh, Karen (2022) “First WTO deal on fishing subsidies hailed as historic despite ‘big holes’”, The Guardian, June 21, available here.
North, Douglass C. (1981) Structure and Change in Economic History, WW Norton.
Ostrom, Elinor (2005) ‘Policies that crowd out reciprocity and collective action’, in H. Gintis, S. Bowles, R. Boyd and E. Fehr (eds), Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life, MIT Press, pp. 253–76.
Putterman, Louis (2012) The Good, the Bad, and the Economy: Does Human Nature Rule Out a Better World? Langdon Street Press.
Putterman, Louis (2018) ‘ Democratic, accountable states are impossible without “behavioral” humans’, Annals of Public and Cooperative Economics, 89(1): 251–8.