You may have noticed that The Humane Condition articles have been sparse over these past summer months. This is in no doubt, partially due to my summer job working as an assistant chef. However, my experience in the kitchen offers an insight into the wastefulness and destructiveness of public goods and property.
Even the Roads?
This lesson starts with a simple anecdote concerning dishwashers and root beer. Specifically, I noticed that my dishwashers were drinking root beer at an alarming rate and far more frequently than anyone else I have ever observed. What led to this particular behavior among my dishwashing staff? Were they more gluttonous than the average American? Did each and every one of them just happen to have a deep appreciation for the sugary drink? I think not. In fact, the answer to this lies in the economics of public goods versus private goods. This is because the root beer was not supplied by the dishwashers nor was it allocated as private property among them. In fact, we would order cases of root beer as a treat for the dishwashers to enjoy. However, the distribution of the root beer was left up to the dishwashers. To put it simply, the cases of soda were public goods for the dishwashers to enjoy. This led to certain incentives which actually demonstrate the nature of man and public property.
To start with, the root beer was scarce. In other words, there was a finite amount of root beer available in the kitchen. When the supply ran out, the dishwashers would have to wait for the next food truck. Because the soda was treated as a public good, they all had equal access to the supply until it ran out. The public arrangement incentivized the dishwashers to actually consume more root beer than they otherwise would have. The equal ownership (or lack of ownership) is the cause to this wastefulness. Each time a dishwasher took a root beer from the soda supply, he essentially took one potential root beer from each of the other dishwashers. Likewise, each time a different dishwasher took a root beer the original dishwasher suffered from the loss of a potential root beer. In order maximize their psychic revenue, it was in the self-interest of each dishwasher to drink as much root beer as possible so as to minimize potential losses. Thus, the dishwashers often burned through their supply of root beer before the next food truck was en route.
How does this lesson apply on a broad scale with public policy? The same incentives to burn through public root beer apply to public resources. That is why private tree farms do not suffer from mass deforestation. If the forests were public, it would be in the interest of every lumber company to clear as many trees as possible. People often say that free market capitalism promotes Darwinian competition. Yet it is distinctly the attribute of public property that would lead to competition and excessive lumber production. If the lumber forests are privately owned, as is often the case, it is in the interest of the forest owner to clear only as much lumber as is needed to meet the demand of the market. Anymore would burn through the entrepreneurs resources and drive down the prices of various lumber goods. The forest owners could save the rest of their natural resources for future use without fear of suffering potential losses from other competitors harvesting their lands.
Public property rights do not only lead to excess waste of resources. It also leads to an increase (not decrease) in pollution. There are certain aspects of nature that governments do not allow private property rights in. Certain bodies of water and clean air are some of these goods that remain in the public realm. One might argue that oxygen is so abundant that it is not scarce and that it is pointless to assign property rights for it. However, clean air can be a scarce good based on a factory and its proximity to people.
What does public property (or lack of private property rights) have to do with pollution? Public property creates certain incentives for businesses to produce what economists call “negative externalities.” To put it simply, it pays a business to send smog into the atmosphere or dump sludge into the local lake because there are no defined property rights in either of those realms. To be fair, modern day governments do try to make up for this with certain regulations against polluting. However, politicians are terrible custodians of the “public’s” property. They can be easily bribed by the factories themselves or might not have enough of a motive to stop it. It is important to note that the custodial political agency has as little property rights in said public good as the factory that wants to pollute it.
How should the “negative externalities” problem be dealt with? The solution is to internalize the negative externalities the public property creates. In order to do this, private property rights would have to be assigned to goods and resources that are now in the public realm. If each resident of a small town had a property right in clean air, the factory would have to contract with each resident that its pollution would reach. As the town becomes more and more populated, the harder it becomes for the factory to contract with each and every resident.
Furthermore, the benefits of private property rights do not just come from ownership outside of the factory. A factory owner who owns the lake next to his/her factory is far less likely to dump sludge into it compared to if the lake was publicly owned. This is what is meant by “internalizing” the negative externalities. This is because the owner now has actual property rights in the lake. The incentive changes from taking as much advantage of the lake as possible to preserving as much value of the lake as possible. I do not need to work out the theoretical reasons as to why this is so. There is peer reviewed, empirical evidence that backs this claim up. I am referring to a peer review study published by the University of California at Berkley with support from Universidad de San Andres and Universidad Torcuato Di Tella. The study itself is a fascinating read. However, for the sake of brevity, I am going to quote the full abstract and nothing else. I will provide a link at the end so that those interested can read the full study. Argentina went through a mass water privatization policy change thirty years ago. The abstract explains the results.
“In the 1990s Argentina embarked on one of the largest privatization campaigns in the world as part of a structural reform plan. The program included the privatization of local water companies covering approximately 30 percent of the country’s municipalities. Since clean water and sewage treatment are critical to control the spread of infectious and parasitic diseases; access expansions, quality improvements, and tariff changes associated to privatization may have affected health outcomes. Using the variation in ownership of water provision across time and space generated by the privatization process, we find that child mortality fell 5 to 7 percent in areas that privatized their water services overall; and that the effect was largest in the poorest areas. In fact, we estimate that child mortality fell by 24 percent in the poorest municipalities. These results suggest that the privatization of water services prevented approximately 375 deaths of young children per year. We check the robustness of these estimates using cause specific mortality. While privatization is associated with significant reductions in deaths from infectious and parasitic diseases, it was uncorrelated with deaths from causes unrelated to water conditions.”
The results seem clear. Public property is harmful, wasteful, and leads to dog-eat-dog competition that is far more destructive than free markets and private property.
- Will Shanahan, Contributing Editor for The Humane Condition
 Sebastian Galiani, Paul Gertler, Ernesto Schargrodsky, Water for Life: The Impact of the Privatization of Water Services on Child Mortality, (California: University of California at Berkeley), 2002.