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Thursday, November 5, 2015

Tragedy of the Commons: Public Ownership

Consider this quote from Economist Murray Rothbard, Phd:

"We all hear a great deal about 'public' ownership. Whenever the government owns property, it is referred to as publicly owned. When natural resources are sold or given to private enterprise, we learn that the public domain has been given away to narrow private interests. The inference is that when the government owned anything, we-all members of the public-own equal shares of that property. Contrast to this broad sweep the narrow, petty interests of mere private ownership."

In this analysis, the discussion of public vs private goods shall not be reviewed under a "good" vs "bad" framework, but through the framework of economics. This analysis will explore public goods vs private goods with the following: (1) How Capital is raised, (2) how these goods are economized via pricing and the profit and loss mechanism, and (3) how ownership is utilized with both private and public goods.

Capital

With Private Goods, goods are produced by Capitalists exercising the notion of private ownership to enhance their enterprise and make a profit. The Capital invested is raised voluntarily, as investors, banks, and the like mutual agree to invest in the enterprise. Investors seek to make a return on investment to enhance their overall livelihood.  If the enterprise cannot raise the capital needed to start up the business or maintain the enterprise, the firm may seek to shut down. The capitalist may need to reorganize his/her plans, or seek to start up another type of endeavor. The point here is that the "free market" determines if this project will be funded. 

Contrast that with a Public good. While, these goods are used by the public, the capital needed to create those goods is "unlimited". This means simply that the capital is not raised by force, but by the Government's ability to levy a tax on its constituents. While it is true that many Governments can raise capital via selling bonds and the like, the repayment of those bonds are underwritten by the current or future taxpayers, as this done by force also. There is no true "free market" mechanism that can provide feedback to the Government body to reject or take on the project. Some will state that the voters can vote for a project's creation via a ballot, but this is not a free market mechanism, as there is no profit a loss feedback on the project to allocate scarce resources.

Pricing and Profit/Loss

The use of prices, in the role of voluntary exchange is vital. Prices send signals to the participants in the market on how to allocate those goods and services.  This allows individuals to set their preference ranking according to their available resources. 
For business owners, the profit and loss system is vital. If a business turns a profit, it provides a signal for the business owner to carry on with the sale of that good. If there is a loss, the business operation is evaluated accordingly. If the losses continue, the business owner may discontinue the sale of that good, or he/she may close down the entire operation. 
On the other hand, the Government enterprise will use price to charge the patrons for the service. However, the Government will ignore the profit and loss feedback. The survival of the Government project is not predicated on profit and losses, but it's survival is predicated on political favors. This may occur dispute continued losses and deficits. Of course, these losses are subsidized by increasing taxes or borrowing more capital to "true up" those shortfalls. All of this is underwritten by the taxpayer.

Ownership

With a private enterprise, as previously mentioned, capital is raised voluntarily and via private means.  In most cases, the capital invested is accepted in exchange for some sort of "ownership" or "interest" in the enterprise. For example, if a company is taken "public" via an initial public offering, those stock shares are sold to investors. Those shares represent an ownership in the company. Another example is when investors pool their capital together to form a business entity(e.g LLC, Inc, LP, and the like) In these business entity forms, the investors have some sort of "ownership" in the enterprise. These examples represent true ownership in the business enterprise. 
With a Public Good, politicians claim that the "public" owns that said enterprise. Is this really the case? Do the citizens actually "own" or "stake a claim" of the Government owned enterprise? In review of the earlier section, Governments raise capital primarily by two means: Taxation and Debt. With regards to taxation, this is not a voluntary exchange transaction, but it is done by the force or Government fiat. There is no "ownership" given in exchange for this method. In fact, if taxes are not paid, dire consequences can occur. The other method that Governments seek to raise capital for the projects, is utilizing debt instruments, such as bonds.  With Bonds, there is no ownership claim on the Government enterprise. In fact, the repayments of the bonds are done via tax revenues. This is a contrast to a public enterprise. 

Conclusion

Based on these three categories, it is clear that Government run enterprises, or "Public Goods", are not market efficient.  Since these enterprises do not allow for voluntary exchange, with prices allocating scare resources to their highest uses, problems occur. Things are carried forward not by the notion of profit or loss, but by political favors. This is done at the expense of society. 

Video of Tragedy of the Commons: 






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