Chocolate and Gold Coins

Tuesday, May 16, 2006

Public Goods – Who Should Pay?

My family saw a silly children’s movie on Sunday: Hoot. It is about some teenagers who fight to protect a group of endangered owls from an evil developer.

The movie was not as bad as you might first think. It was really pretty funny for the most part. In typical children’s movie style, all of the adults are nitwits or comic villains and only the children act like ordinary people. It feeds the ego of children to see other children as more capable than adults.

But the plot of the story was not only a cliché but a dangerous economic lesson as well. The evil developer ignores the protected wildlife that they are endangering by developing the land. In the climax, the villain faced with the prospect of loosing his land to the owls threatens to bulldoze a group of citizens assembled for the groundbreaking ceremony. It doesn’t sound funny, and although it is played for laughs it really isn’t all that funny.

But the message is unmistakable: corporations are basically evil organizations with tons of money that they greedily amass and should be forced to pay for the good of the community. Now, it is true that corporations really don’t care for the environment or any other public good (unless it is built into their profit function) and so they might have incentive to break the law to avoid paying a big fine or, in this case, to avoid loosing their land. But I wonder how many people watching the movie wondered if the law – by forcing the entire burden of protecting the owls on the landowner – might create criminals who otherwise might be honest.

Protecting the environment is a pure public good. Who should pay for that good? A simple and fair method would be to make those who benefit most from that good pay for it. If one could know how much each person was willing to pay for the public good, then taxing each person in proportion to his or her benefit would be fair. Of course, it is difficult to impossible to get people to reveal how much they are willing to pay because they cannot be excluded from the good after it is bought. But it is reasonable that most people’s willingness to pay would be close to the same fraction of income. If the community votes to tax each person’s income (or home value) by a fix amount to pay for the good, then the outcome will be roughly fair.

Why then do people think it is fair that only those unlucky enough to have protected animals on their property should have to pay the entire burden of protecting these animals? It is exactly like a community confiscating a person’s home for building a school or a road and not even paying fair market value as compensation. How is that fair?

I used to think that such a confiscation was a bummer for the homeowner but not necessarily economically inefficient. But I realize now that if you place too high a tax burden on a few, they will have incentive to waste precious time and resources to shift that burden onto others. They will also have much more than the ordinary incentive to break the law.

People support these laws because they enjoy the benefits of the environment without having to pay for it. They like to think that it is fair because the only ones who suffer are “evil corporations”. But isn’t getting a benefit without paying for it basically evil?

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