Economics literature recognizes the differential
nature of goods. Each good is unique in itself. It must be pointed out that in
economics, good is something than enhances economic welfare while bad is
something that reduces economic welfare. For practical reasons, one can assume
economic welfare to be equivalent to social welfare. Secondly, contrary to
public perception about distinctions between goods and services, economics
literature clusters both of them into goods (the singular of which is good). The
past post “Examining
the Nature of Good” went to certain depth in examining the nature and
classification of goods. The current post would seek to build up on the same
and strive to understand why certain goods are provided in the market whereas
certain goods are offered only by the government. In theory, nothing prevents
the private sector from offering every good, or in other words converting each
good into either private or club good. Similarly, nothing prevents the
government from offering all goods itself including the private goods without
changing the nature of the good. In fact the latter was the staple of the
communist regimes. At least to a substantial extent the state occupied what PM
Nehru would term as commanding heights of the economy.
What is of importance is not per se
whether the government or private sector offers the goods, but the conditions
in which the government has to offer certain goods by itself. In other words,
the private sector by its very intrinsic nature would not be in the market for
these goods. One can cite the example of national security and thus the armed
forces. Across the world, the armed forces are a monopoly of the government. It
is not that private sector does not offer national security services. There are
enough private armies which do exist across parts of the world. Yet the private
armies are more of an extra-state, extra-territorial actors engaged in armed
conflicts and rebellion. Private sector does supply numerous goods to the armed
forces but the nature of these goods is rivalrous whereas the private sector is
absent in the armed forces themselves. Similar is the instance of the justice
system. The judiciary is the preserve of the state. There are of course local
panchayats so as to speak that are empowered to offer justice but these are
more exceptions. They are generally in the areas where tribes reside and the
tribals have certain unique practices which need to be preserved. Furthermore,
these panchayats or territorial councils etc. have state sanction to exercise
judicial power. The non-state actors enforcing judicial laws happen in failed
states and therein too they are virtually a monopoly.
Likewise, we find such instances in
law and order too. It is either the state or state sanctioned monopoly that
rules the roost so as to speak. This might pose a question to the absence of
the private sector in these areas. Towards understanding this, one must resort
to enquiring about the nature of goods. The goods are characterized in their
identity through the principles of exclusion and rivalry. The goods are either
rivalrous or non-rivalrous while second paradigm being excludability or otherwise
of the good. Rivalrous is inherently an intrinsic characteristic whereas the
excludability is something of an acquired characteristic. This is something
that needs to be decoded.
The goods mentioned above as with
few others are characterized by non-rivalrousness as also non-excludability. One
cannot argue that the state will not defend those who do not pay the costs of
purchasing the goods. In other words, there is a problem of free rider. Free
riding theorem suggests, that the nature of these goods makes it possible that
many might not pay the price yet avail the benefits of these goods. The state
by nature cannot prevent the non-taxpayers for instance from access to law and
order or justice. The free riding
theorem is something that prevents the private sector from offering these
public goods. If the private sector were to offer these goods, those who do
avails of the services or rather buy these goods cannot be excluded. In the
inherent dynamics of the private sector working, the important part is the
price. It is the interplay between demand and supply. The imbalances lead to
the changes in prices. If it were to price national security for instance at
some price, there must exist a mechanism that would ensure that those who do
not buy the good are deprived of its access. The excludability characteristic
is something that has to exist. For instance, cable television, internet,
swimming pools, classroom teaching are instances which can be non rivalrous in
their offer. Yet along with the non-rivalry there exists a possibility of
excludability. If someone is not a member of the swimming club, he or she can
be deprived of its services. Similarly the agent who owns a private lake or a
pond can deprive people from accessing the same. Yet it cannot be done in the context
of the public goods.
Air is something that cannot be
excluded. In fact, air is per se a natural public good since there is no one
who can even claim ownership of the same. The same might not hold good for
pastures which are non rivalrous indicating a possibility of what is termed as
tragedy of commons. Yet public goods like defence, law and order, justice are
something that have to be provided. These are the goods that enable the
functioning of the society in its splendor. Therefore, there is a need for
service provider who is willing to factor in the free rider problem. The private
sector will not be able to do the same. In its absence the government has to
step in. The government has to ensure that the citizens are not deprived of
these services as they continue to function in their economic and social space.
Economic space is something critical as is social space, yet in the absence of
the above services, one would return to the natural state of affairs, if one
were to borrow the phrase from Hobbes. Thus we observe the public goods are
offered only by the government and not by the private sector.
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