I have just finished reading The Logic of Collective Action: Public Goods and the Theory of Groups by Mancur Olson.
The book deals with public goods as opposed to private goods. A private good is something like a chocolate bar, a book or a iPad – I can buy as many as I wish, and it doesn’t really concern anyone else. A public good is then something like clean air, clear roads, an educated population or an efficient police force. They are things that we all benefit from and they necessarily concern many people*.
The main argument of the book is that people will generally not come together to provide enough public goods, without some other incentives being provided. To illustrate this, imagine that we didn’t have a government that provided armed forces to prevent us from foreign attack.
Everyone in the country would have to voluntarily pitch in together to come up with enough money to pay for the pay, training and equipment for the armed forces. Leaving aside the sheer trouble in bargaining, each individual will realise two things. One, it is unlikely that their contribution would be decisive as to whether enough money is gathered; since they bear such a small fraction of the costs. Two, if enough money is collected and armed forces are provided, they will benefit from the armed forces’ protection whether they contributed or not. So it is not rational for each individual to contribute. Individually sensible decisions prevent a collectively sensible decision**.
Luckily, we do have government that forces everyone to cough up through taxation for certain public goods like defence, law and order, schools etc. That is, selective incentives are provided – carrots and sticks (pay your tax or go to jail) – that aligns the individuals incentives with the public’s as a whole. Since a large part of our political discussion revolves around deterring free-riders like benefits claimants and tax evaders who enjoy public goods without contributing towards them – it shows that this issue is not merely academic.
It does raise the question, though, how many other public goods*** are we not providing – like a clean environment or uncongested roads – because we have not figured out what selective incentives we can provide to get individuals to contribute to the collective good?
*These are rather non-technical definitions. The distinguishing characteristics are whether goods are excludable (can you prevent other people from using them?) or rivalrous (does one person having something prevent someone else from having it?). Private goods are excludable and rivalrous, where public goods are non-excludable and non-rivalrous.
**Astute readers may see a similarity with my discussion of externalities in my post The UnWisdom of Crowded Roads.
***And the converse – how many public bads like pollution and traffic jams are we over-providing.