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Public Goods and Negative Externalities: A Real-World Problem Essay (Article)

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Updated: Apr 12th, 2019

Introduction

The growing social awareness and increased attention towards sustainability and the value of public goods have resulted in a profound shift of public consciousness. Private businesses are bound to comply with numerous laws and limit their participation in the economy, in order to reduce the potential harm caused to the nature and people and avoid possible violations of the new sustainability requirements.

Organizations are developing complex sustainability policies to confirm their commitment to the importance of public good; meanwhile, individuals are becoming more potent in the defense of their individual and collective rights. Unfortunately, laws and courts that govern sustainability processes in business have little to do with economics.

In the meantime, any decision to limit economic production for the sake of another public good, e.g. the environment, inevitably leads to other negative externalities, for instance, the lack of essential goods in the market. According to Ronald Coase, the problem of public goods and negative externalities is reciprocal, and any decision is essentially about the proper allocation of the existing resources and not about limiting the production of one good over another.

Public good: Defining the term

Despite the common use of the term “public good”, few, if any, authors provide its definition. More often than not, the meaning of a public good is taken for granted. This is, actually, one of the basic reasons why economists and legal professionals face a certain degree of confusion, when dealing with various public good issues.

For the purpose of this paper, the definition offered by Paul Samuelson will be used. Samuelson defined public good “as a collective consumption good; one individual’s consumption of the good does not subtract from any other individual’s consumption of the good” (McDonald & McMillen 267). However, it is not enough to say that a public good is consumed collectively; the main features of a public good should also be identified.

Modern economists usually speak about the two main features of a public good. First, a public good is that which, once provided and consumed by one person, does not demand any additional cost from another person who also consumes it (Rosen 56). In other words, a public good can be consumed collectively in a manner that is nonrival: it does not really matter how many people breathe the open air or catch tan under the sun.

These public goods can be consumed collectively at no additional cost for every new consumer. Second, and it follows from the first feature, no one can physically or reasonable prevent anyone from using a public good (Rosen 56). In professional terms, every public good is nonexcludable (Rosen 56).

No one can forbid certain individuals to walk under the sun or breathe in the open air – the sun and the air are both public goods that can be used without any limits. Still, it should be noted, that the goods mentioned above are pure public goods. Simultaneously, a wide range of marketable public goods are available to consumers. These include but are not limited to public transport, healthcare insurance, energy, etc.

More importantly, any public good that is considered as pure can lose its absolute “purity” and become non-absolute. A classic example is the growing number of people over a limited territory that leads to congestion and limits the availability of fresh air and heat (Rosen 56). In this situation, the air and sun that used to exemplify pure public goods are no longer nonrival. The cost of these goods for each new visitor will continue to increase, whereas their availability with each new visitor will gradually decrease.

Ronald Coase and the Public Good Proposition

Public goods often become the central objects of legal arguments and economic discussions. With the growing society’s emphasis on sustainability, environmental protection, and the common good, many individual consumers and businesses are bound to sacrifice their interests and pursue some distant social goals. In the past decades, numerous laws were created to govern the relationships between consumers and public goods. However, the nature of these relationships is not really about laws but, actually, about economics.

At the heart of Ronald Coase’s article “The Problem of Social Cost” is the idea that the problem of the social damage caused by businesses to the society is, in reality, a reciprocal problem. Traditional approaches rely on the distinction between private and public goods (Coase 1). In these approaches, social (public) goods are assumed to be more vital to the society than the private goods produced by businesses (Coase 1).

Consequently, it has become common and even desirable to make businesses and their owners pay for the damage they cause to the society, the environment, and other public goods (Coase 1). The forms used to make businesses pay for their public mistakes vary, depending on the situation, and may imply a fine, the costs of quality assurance, or even the limits imposed on the amount of goods and services businesses are allowed to produce.

Yet, when considered more thoroughly, the problem of the public-private relationship is much more sophisticated. In the economic terms, the decision to make business pay for its public damage is inherently and unavoidably harmful (Coase 1). To limit businesses in their impacts on public welfare is the same as to inflict harm on them (Coase 1). Coase argues that the problem of public goods and social benefits is reciprocal, because to avoid the harm to society, society will actually need to harm businesses (1).

Coase uncovers the hidden facets of the society’s relationship with businesses. In the recent years, it has become very popular across the developed societies to hold businesses and private entities responsible for the harm they cause to the provision of public goods and society’s welfare.

One of the fundamental assumptions made by Coase is that, in the fight between the public and the private, the latter is bound to take a secondary position. Simply stated, the goals and principles pursued by businesses are commonly regarded as of secondary importance against the values and principles pursued by the public.

This is why, in many legal cases, businesses are made to comply with laws and carry considerable losses, simply because most legal professionals lack any economic insight. To a large extent, the problem of the private versus public is similar to the problem of cattle and crops: whether the cattle owner should build a fence or the crop owner should sacrifice some of his/her territory is difficult to define, unless “we know the value of what is obtained as well as the value of what is sacrificed to obtain it” (Coase 2).

In these situations, it may well appear that the costs of the damage caused by a manufacturing businesses to a nearby river are much lower than the costs of closing the facility and leaving hundreds of people without jobs. It is the question of costs and values. In Coase’s view, it is also the question of resource allocation and balance across multiple market players.

Using Coase’s ideas to analyze contemporary problems

Today’s world is being torn between multiple social priorities, and chances to reach an ideal balance are close to zero. Healthcare, public transport, energy consumption, and climate change all have direct or indirect relation to public goods and all impose new demands on businesses and private entities.

Starting with health care, which is claimed to be a universal right and a public good, many businesses are bound to carry the burden of increased healthcare costs. They pay higher premiums for their employees and devise new quality assurance models to avoid the negative impacts of their business processes on public health.

Yet, taking Coase’s argument into account, the value of these premiums and their real impacts on the quality and accessibility of healthcare for the poor should be thoroughly analyzed. In a similar fashion, the costs of new quality assurance systems and their real effects on public health need to be weighed.

In economic terms, the discussed problem can be readily limited to the problem of marginal costs and marginal revenues: how much marginal revenue does another unit of health premiums or quality assurance systems bring? This is the question that needs to be answered to achieve the desired outcome for all parties.

The situation is quite similar with the impacts of transport on the air quality and their implications for public transport and poor households. Car owners are usually blamed for the contribution they make to air pollution. According to Eskeland and Kong, air quality is a pure public good, as long as it is nonrival and nonexcludable (1).

Today’s public policies vote for decreasing the number of private cars and enhancing the quality of public transport networks which, eventually, should help to improve the quality of air in urban and rural settings. Again, the reciprocity of the problem should not be ignored (Coase 1). Another approach to solve the problem of air pollution is needed.

This approach should necessarily involve the analysis of the public transport availability in rural settings, the costs and benefits of car ownership by rural residents, the impacts of rural car owners on the quality of air, as well as the potential impacts of other policy decisions on rural residents.

Eventually, it is rural residents who are most likely to suffer the lack of transport, regardless of the quality of air in their area. Most likely, the public transport and air quality policies proposed by governments and volunteering organizations will have to be more aggressive for urban residents and less aggressive for rural and poorer households (Eskeland & Kong 1).

The elimination of private car ownership and the extension of public transport networks by themselves will not eliminate the existing deficiency and help achieve the desirable social result (Coase 26). Without considering other changes in the system that will follow the corrective measure, the costs of such measure may turn out to be too high.

No less complicated are the problems of renewable versus traditional energy resources and the problem of climate change. With the growing scarcity of traditional energy resources, more and more communities recognize the economic and, more importantly, social validity of renewable energy systems.

The demand for renewable energy constantly increases (Simon), but who is allowed to benefit from renewable energy, and does one have the right to refuse from the renewable energy shifts and keep using traditional energy? Apparently, the government cannot just demand that all businesses and households switch to renewable energy.

Many manufacturing enterprises still depend on traditional energy sources. In these questions, economic policy decisions should be based on the opportunity cost considerations and the potential value of renewable energy both for the businesses involved and the broader processes in global climate. Eventually, the most essential is involving economists in all policymaking processes. This is, probably, the most reliable method to improve the quality, efficiency, and feasibility of the future policy decisions.

Conclusion

Economic policymaking is an extremely complicated process. Unfortunately, on many occasions, the economic aspects of policies give place to the legal ones. How to ensure that businesses operate for the common good is a difficult question, but it is clear that the economic implications of policy decisions should always be considered.

According to Ronald Coase, the problem of public goods and negative externalities is reciprocal, and any decision is essentially about the proper allocation of the existing resources and not about limiting the production of one good over another. In healthcare or energy decisions, the questions of marginal revenue, marginal cost, and value should be thoroughly analyzed. All economic decisions should also be based on opportunity cost considerations, as they definitely allow improving the quality and efficiency of policymaking results.

Works Cited

Coase, Ronald. “The Problem of Social Cost.” The Journal of Law and Economics, (October 1960): pp.1-28. Print.

Eskeland, Gunnar & Chingying Kong. Protecting the Environment and the Poor: A Public Goods Framework Applied to Indonesia. The World Bank, 1998. Print.

McDonald, John F. & Daniel P. McMillen. Urban Economics and Real Estate: Theory and Policy. Hoboken: John Wiley & Sons, 2011. Print.

Rosen, Harvey. Public Finance, 7th ed. New York: The McGraw-Hill Companies, 2005. Print.

Simon, Christopher A. “Is Energy a Public Good?” Renewable Energy World, 2 July 2007. Web.

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