Wednesday, February 4, 2015

Free Riders and Favor Seekers


You might – maybe? – have noticed that vaccinations against certain diseases have been in the news recently. And just as I started to think about this as a free rider problem, The Economist runs a good piece by Will Wilkinson:
The provision of public goods often poses a collective action problem. A public good will not get provided unless enough of us pitch in to keep it going. The difficulty is that it is in the individual's rational self-interest to withhold his or her contribution and to "free ride" off the contributions of others, if possible. But if too many people free-ride, the public good starts to go away.
Tyler Cowen, professor of economics at George Mason University offers this on public goods:
“Nonexcludability” means that the cost of keeping nonpayers from enjoying the benefits of the good or service is prohibitive. If an entrepreneur stages a fireworks show, for example, people can watch the show from their windows or backyards. Because the entrepreneur cannot charge a fee for consumption, the fireworks show may go unproduced, even if demand for the show is strong.
The topics are different but the points from Mr. Wilkinson and Mr. Cowen are the same: I don't always have to pay for something to get benefit, but enough people have to pay to pick up my slack.

Clean air is a public good but I don't have to pay for it as long as no one fouls it. However if there are too many producers emitting too much pollution, the benefits I derive from clean air are diminished. Externalities – costs not borne by the producer – arise from an absence of property rights or ownership; I don't own my clean air. And if polluters don't internalize their cost voluntarily, then I have to pay someone – typically government via taxes – to regulate and force compliance.

In some ways energy derived from fossil fuels could be seen as a public good. Though near-term abundance might indicate otherwise, there is limited supply of fossil fuels; inefficient use of fuel drives up the near-term price and reduces its long-run availability. Yes, wasters pay for fuel but I pay the price for higher demand, depleted supply, and polluted air.

Tax subsidies – deductions, credits, exclusions – produce a kind of free rider: your taxes are lower and everyone's tax rate is higher because you took a deduction. OK, I know: Congress gave you the option to take a deduction and raised rates to offset the expected revenue loss. So is charity a public good? Are mortgaged McMansions? What about tax-advantaged 501(c)(3) political organizations or "dairy herd improvement association"?

John Micklethwait, departing editor for The Economist, put it this way; "With each tax break for the already rich and with each subsidy to this business or that pressure group, another lobby is formed, and democracy suffers."

And with each free rider and granted favor the rest of us suffer higher costs and greater sacrifices.

Sometimes, it's the ultimate sacrifice.