Paying for Public Goods

Let’s discuss economics!

Last week, I presented an idea for introducing a social life to suburbs outside of LDS churches. I observed that the public space that is provided is seldom used, and suggested that one way to get that space used and start to build communities instead of neighborhoods is by starting “community clubs” responsible for planning, promoting, and providing social activities, namely block parties,  in these spaces on a regular basis. I think that if we can get people out of their houses and into the parks on Fourth of July weekends or for just a random weekend, our suburbs would be invigorated with a life they desperately need. These events would be free, maybe even providing free food (or food at a low cost).

The first problem is basic: someone needs to pay for these events or the support of the clubs. I will explore this problem in more depth now.

Would we expect people in the community to donate to the clubs? Obviously not. The club is a voluntary organization and not everyone will be a member. If we counted on donations from the community to fund the clubs, they would be severely underfunded. Certainly we could try and encourage donations, but we should not expect those donations to account for more than a small fraction of the budget.

Why? The problem is a classic one in microeconomics: the free-rider problem. When a good is a public good (meaning that more people than those who purchased the good benefit from its use), not enough of that good will be purchased to meet the real demand for it. Everyone would prefer that someone else pick up the bill, so in the end, no one pays (or very few people pay, those who want that good no matter what), and the good isn’t purchased.

… the free-rider problem needs to be addressed.

Most public goods are goods for which consumption can’t be restricted to only those who pay. For example, consider fireworks. Many people can opt to not buy their own fireworks, and instead sit on their porch and watch other people light their fireworks. Those who bought fireworks can’t really stop the free-riders from enjoying their fireworks (sure, they could light them in the garage, but that wouldn’t be wise or legal). For community events, restriction of consumption is neither desirable nor practical. If a community group is launching fireworks on the 4th of July, many will be able to see it. Furthermore, the goal of these events is to get everyone in the community to participate, not just those who paid. Thus the free-rider problem needs to be addressed.

There are a number of top-down solutions to the free-rider problem. At its core, the free-rider problem arises when a good has social benefits but private cost. Classic government solutions seek to socialize the cost of the good. In short, the government pays for the good in one way or another, either by providing subsidies or tax breaks to those who buy the good, or by providing it directly. They pay for the good (or the subsidy) themselves, and they are funded in turn by taxes. Thus government solutions often require some new tax.

… the list of all parties involved in a complex social relationship such as production and use of a good is extensive. … Perhaps if we think of other beneficiaries we could find a group of people who could provide the funding necessary.

Obviously, new taxes bring controversy and politics, and I think we should avoid that. Let’s think back again to the details of the free-rider problem. Why does it exist? It exists because not all beneficiaries are willing to pay for the cost of the public good. But who are the beneficiaries? In practice, the list of all parties involved in a complex social relationship such as production and use of a good is extensive. This means, in the case of community clubs, that the members of the neighborhoods are not the only people who could benefit from the clubs’ public events. Perhaps if we think of other beneficiaries we could find a group of people who could provide the funding necessary.

Philanthropists are one group. Certainly tax benefits exist for providing for a non-profit such as community clubs. The funds from philanthropists could help create an endowment that would provide a stable source of funding for the clubs. This helps, but I doubt that this would fix the funding problem.

We may hate advertising, but truth be told advertising does so much for us.

Picture

Another group is the local business community. Here I see hope. We may hate advertising, but truth be told advertising does so much for us. Services such as Facebook, Google, television, and radio are free because of advertising, and other goods, such as newspapers, sports events, and community events are cheaper (if not completely free) because of advertising. Advertising is so fantastic because it eliminates the free-rider problem by shifting the burden of payment from one group of beneficiaries to another, where both cost and benefit are private (Target does not benefit from Wal-Mart’s advertisements, for example).

In the case of community club events, “sponsors” get promoted at the events in non-intrusive ways, from banners and posters in the area to shout-outs by performers. The businesses need to pay for this, and perhaps also would get tax benefits if the deal is worked out so that promotion is seen not as a service to a customer (a business) but as a perk to a donation. I believe this strategy would help close the funding gap for community clubs.

On the other side of the balance sheet, we can reduce costs in a number of ways that actually would help stimulate communities. Consider entertainment. There are so many amateur performers in the city dying not to make a lot of money but just to get a gig. While they should be paid fairly, they don’t need to be paid large sums of money. This would not only save money but boost local culture.

Food would have to be provided in some form at community club events; in our culture, nearly every social event involves food. Catering is ideal for an event, but if this is not affordable, we should hire vendors to service the events. A hot dog cart, ice cream truck, or popcorn cart may be all that’s needed to turn a 4th of July event into something special for the whole community.

There are multiple ways to make neighborhood-wide community block parties financially feasible. Odds are the hardest time financially would be in the initial stages. Awareness would still be building and most potential financial supporters would be skeptical. Over time, though, these problems would begin to go away, and the community club would begin to gain legitimacy. It would build up physical capital (for example, perhaps a large storage of inflatable bouncy houses ready to be deployed at block parties), intellectual capital, interpersonal capital (the connections necessary for obtaining support), and intellectual capital (knowledge of how to work). In the end, our neighborhoods will become the communities we want.

Image source:

http://navycaptain-therealnavy.blogspot.com/2013/06/free-riders.html

http://www.pickchur.com/2011/01/first-impression-is-the-last-impression-creative-advertising-photos/


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