The Science of Demand (48) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 2.  Guru’s Views Questionable

The dispute over public goods was started off by the lighthouse example propounded by John Stuart Mill in 1848. Subsequently, the masters who had participated included Henry Sidgwick (1883), Erik Robert Lindahl (1919), Arthur Cecil Pigou (1938), Paul Samuelson (1953), etc. Mill’s example stated that lighthouse that guided ships passing by had problem in exacting payment, since ships, after following the direction of a lighthouse to avoid reefs at night, could easily escape in the dark. He therefore considered that private lighthouses could not be profitable but required governmental assistance to levy charges. The opinions of Sidgwick and Pigou that followed were that lighthouses should be built by the government and provided free to ships.

Lindahl did not analyze lighthouses, but used the example of public security to first introduce the concept of public goods, saying that market demand equaled summing individual demand curves vertically. Public security is in fact not a good example of public goods, yet “summing vertically” was widely celebrated as soon as it had been proposed. The reason why public security is not a good example of public goods is apparent in Hong Kong soon after World War II. In those days, the public security services provided by the government were insufficient to maintain public order, hence my father’s shop and several shops nearby jointly hired some escort services, also a kind of public security. However, for those shops that did not pay, the hired security guards offered them no protection when robberies broke out. Similarly, in Guangzhou back in 1947, the rich generally subsidized security personnel provided by the government, resulting in the poor having no protection. Public security services therefore became the private good of the rich.

The primary persona in the dispute of public goods was again Samuelson. This twentieth century’s talented theorist agreed with Mill’s view that it was difficult for privately-run lighthouses to exact payment. Yet he added a crucial point: even if it were easy for lighthouses to levy charges, they should not do so. This surprising twist made the whole economics profession turn like a carousel. Samuelson’s argument was that after a lighthouse had been built, the cost of servicing one extra ship was zero – marginal cost equaled zero. Under such circumstances, levying charges would cause some ships to detour. Since marginal cost was zero, such “detour” would harm the society, not charging would therefore be preferred. When Samuelson subsequently received his Nobel Prize, his article containing this argument was referenced.

Public good refers to a good that can be concurrently used, therefore when it is supplied to one extra person, its marginal cost must be zero. If no fee should be charged when marginal cost is zero, then when marginal cost approaches zero, maybe no fee should be charged, either. The analysis then follows is, if fee charged is less than average cost, operations run privately must incur a loss (this is correct), and if fee charged equals or is higher than average cost, then fee charged will be higher than marginal cost (average cost will fall because of increased production, which is correct, too). Since it would harm the society if fee charged is higher than marginal cost, the preferred option is therefore no levy at all or subsidization by the government coupled with price control. This is already a commonplace.

The main point here is: as far as charging is concerned, there are two contradictory views on public good. One is adopting price discrimination to charge to the utmost in order to attain the Pareto condition. The other one is since the marginal cost in servicing one extra customer is zero, no fee should be charged whatsoever. This interesting value judgment, though incapable of explaining market phenomenon, can nevertheless explain the behavior of certain politicians and economists.

According to Samuelson’s argument, if there are no traffic jams, Hong Kong’s cross-harbor tunnel should not levy any toll – the marginal cost of servicing one extra vehicle is close to zero. But if no toll is to be levied, who would build it? The answer is of course the government. Agree or not? Industries having a characteristic of the higher the quantity demanded, the lower the average cost, e.g., electricity, gas, telephone, etc., should all be run by the government, or at least have their fee-charging basis controlled by the government. All this is also a commonplace. The nonsense of economists encountering a government with a propensity for power is similar to a fish finding water, resulting in today’s so-called public utilities typically controlled by the government. The key point here is: for an industry having a characteristic of the higher the production, the lower the average cost, it must have in certain aspect the nature of public good.

A could-not-be-more-superficial error about public good has to be clarified: Samuelson said that no fee should be charged when the marginal cost to service one extra customer is zero, and the service should be provided by the government. Just using an example of a pianist is sufficient.

A pianist charges via his manager for performing in a concert hall. Such a charge is the income of the performer for practicing hard every day. The music that he plays is a public good. Should the government pass new legislation saying that pianists should be nurtured by the government?

Undoubtedly, public goods can be privately produced. Also without a doubt is that for every product or service that has or partly has the nature of public good, the marginal use value of every customer may not be the same. However, it is not exclusive to public good that marginal use values are different for different people. When eating apple, you prefer eating to the core while I would throw it away after a few bites – the marginal use values toward apple between yours and mine are different. Should the government intervene?

Let’s get back to Samuelson. His renowned “Economics” textbook, sold extremely well all over the world, made him a fortune. Each textbook was a private good, yet Samuelson’s thinking in the book was a public good. He tied his thinking (public good) with each textbook (private good) for sale – a kind of tie-in sales – and made himself a fortune, then won the Nobel Economics Prize by opposing to public goods being produced privately. A genius he truly was (a smile).

The crucial point here is: tying public good with private good for sale is a good way to exclude non-payers from enjoyment. Transaction costs can be reduced.