 Let's talk about externalities, public goods, and the role of government. I'm sure this is an important topic for many of you, especially, this wouldn't apply to anyone here, but those of you who like to argue, when you're arguing with your fellow students, maybe some of you argue with your professors, not too obnoxiously, I hope, about free markets and liberty. You know, standard objection, standard response, the first thing that you run into when you have these kinds of discussions is, oh, well, what about, dot, dot, dot? Well, yeah, what about who? Without government, who will build the roads, and to put it a little bit more precisely, a lot of economists will say something like this, free markets are great, you know, free markets, or if they're being fancy, they'd say free markets maximize social welfare with just a few conditions. There are a few little caveats, right? As long as all markets are perfectly competitive and all market participants have the same information, all externalities are priced, the government is supplying the optimal level of public goods and so forth, we could probably come up with a few more of these, right, but the standard answer is, well, as long as there is no market failure, markets are great. Now, of course, there's some question begging right at that point, right? Well, what is a market failure? What they typically define, what your textbooks will define as market failure are things like any deviations from perfect competition, anything other than a perfectly competitive, sort of general equilibrium situation. So monopoly represents a violation of these assumptions, any kind of externality problems represent a violation of these assumptions. Freeriding is a form of market failure. Asymmetric information is market failure, increasing returns and network effects or network externalities as they're sometimes called. Prices that are not perfectly flexible, et cetera, et cetera, et cetera, et cetera. One gentleman was just asking me before the lecture started, did I know of sort of a comprehensive list of all the market failures that have been named in the literature, all the positive and negative externalities that are said to create market failure? I said, I didn't know of such a list. I mean, maybe there's a Wikipedia entry that enumerates them all, but it wouldn't be that hard for you to go out and pull out a few textbooks and make a list yourself and it would be pretty darn long. In other words, what mainstream economists are really saying is, yes, I can imagine a hypothetical kind of imaginary free market that would be great, but the actual free market stinks, right? Because of course, these conditions can never be met in an actual economy. And so therefore, yeah, we ought to have some, well, we ought to have markets. Most economists are not, they're not out and out socialists. They don't think the government should own all the means of production and so forth. I mean, there are a few that typically mainstream economists will say, yeah, we ought to have markets and prices, but we need the steady hand of government to intervene when necessary, wisely and judiciously to combat market failure. So how can we address this kind of argument? What do we think about this? How can we tackle this? Now, free market, defenders of the free market, Austrian economists have devoted quite a bit of attention to thinking about arguments for market failure. I think most of the attention kind of in our circles has been paid to the empirical side. In other words, studying how are roads actually provided in different institutional settings? How were roads provided in history? What about other so-called public goods? How have externality problems been handled in different contexts? Showing that in fact, free markets have done a remarkably good job throughout history and continue to do a remarkably good job today in providing public goods, in dealing with externality problems and so forth. But we can also say something about these arguments purely from a theoretical point of view. And I wanna try to address both theory and empirical evidence in the talk today. So let's start with the theory and implementation of externalities. Okay, externalities is a shorthand word for external benefits and external costs and the standard analysis. And I'm sure many of you, if you're an economic student, you've seen these kind of diagrams many times. The sort of standard analysis you get, sometimes called Pagoovian welfare analysis because the British economist, A.C. Pagu was a strong proponent, important contributor to this kind of analysis. And the basic idea is, well, imagine a market in which some good or service is being produced, but there's a kind of a spillover good or service that is being produced at the same time, right? So suppose this is, we're looking at the steel industry and this is, I have a supply and demand diagram depicting steel production, a steel company or the steel industry. There's a demand for steel based on the willingness to pay of consumers if steel is being used as an end product or the marginal revenue product for the point of view of entrepreneurs if steel is an intermediate good. And there's a supply curve for steel in sort of this standard neoclassical kind of, with the standard kind of supply curve. And there's an equilibrium price and quantity. Gosh, I can hardly see here. I think it's P, P, P and Q, P would be the equilibrium price and quantity that's achieved in the steel market and your professor will say, yeah, that's great. That's exactly what we want. That's efficient, but, but, right? What if the steel factory is also emitting smoke into the air? So as a byproduct of producing steel, it's also producing pollution, smoke. And let's say that smoke, without getting into weird debates about climate change just to make it simple. So suppose that smoke, the little smoke particles drift to the neighboring next door to the factory. There's a farm and the little smoke particles fall onto the farmer's crop and do some damage to the farmer's crop. So the Paguvian analysis says, well, there are actually two outputs here, right? This production process is producing two things, steel, which is valuable to society, but it's also producing damage to the farmer's crop, which is harmful to the farmer. And if the steel producer is only looking at maximizing the steel producer's profits, the producer will, this market will equilibrate to price and quantity given by or the supply and demand curve intersect. The problem is, this industry is not considering all of its costs, right? So the costs from a neoclassical perspective that go into deriving the supply curve are the how much you have to pay for labor, how much you have to pay for the different iron and so forth, the ingredients that go into steel, how much you pay for energy and the rent you pay on your building and so forth. But there's an additional cost of producing steel, namely that some of the farmer's plants are damaged. Say it's wheat, some wheat is destroyed. That's an additional cost of producing steel because the steel industry or the steel firm is not taking this into account. Too much steel is being produced because the decision maker is appropriating all the benefits from production but only bearing some of the costs, right? So imagine that you could quantify the value of the wheat that is destroyed per unit of steel produced and you could just add that onto the supply curve, right? Then you get this higher supply curve, so-called social cost curve. So the idea is that the lower supply curve represents the private cost to the steel industry or the steel producer. The higher supply curve represents the cost to society of producing steel, which is the explicit cost to the steel maker plus the harm that's done to the farmer's crop. And so if the steel industry were somehow forced to take all of the relevant costs into consideration, then the equilibrium price and quantity would not be P, and QP, but PS and QS. Equilibrium quantity would be lower, equilibrium price would be higher, right? So the optimal amount of steel from society's point of view is the quantity of steel you get when all benefits and all costs, including the spillover benefits and costs, are taken into consideration, okay? So the Puguvian model says, well, what do you do about this? Well, the government, again, the wise and all-knowing government should impose a tax on the steel industry equal to the vertical distance between those two supply curves, thus making the steel industry de facto pay the full cost, right? So the steel producer has to pay for iron and electricity and labor and has to write a check to the government for the tax, and therefore the steel industry is now looking at the higher supply curve as if it were that is now the supply curve that's relevant for steel production. And so you get the equilibrium, the correct socially optimal price and quantity PS and QS. And presumably, though this isn't always mentioned in the analysis, the government would then take the tax revenue and give it to the farmers to compensate them for the damage and a little bit would leak out so you can take junkets and waste money and other ways that government waste it. So what can we say about this analysis? Now, some of you were in my talk, I think on Wednesday about cost curve analysis. So there's an Austrian subjectivist critique of standard cost curve analysis that would apply here the same way it does to any model of, you know, sort of neoclassical cost, but leaving that aside for the moment, there's some more basic objections to this specific, the specific Paguvian treatment. So first, you know, how do we measure these benefits and costs, right? How do we know what is the true social cost as opposed to the private cost, right? Because these spillover costs and benefits are not demonstrated in action, right? They're sort of asserted by the person who is bearing the cost. Or in the case of a positive externality, right? Someone says, oh, I'm receiving a benefit that I'm not paying for. So somehow we want to force that person to compensate the producer, so the producer will produce more. Well, how do we know what is the actual size of these benefits and costs? What is the, you know, how high should the tax be? Or how high should the subsidy be in the case of a positive externality? A second problem that is recognized even by neoclassical economists is that, you know, positive and negative spillovers, unpriced external benefits and external costs are ubiquitous. They're sort of everywhere, right? So, yeah, I mean, not only is there a farmer next to the steel factory who's losing some of his crop yield every year because of the pollution, but there's a, you know, a Greenpeace activist type who lives down the street or maybe lives anywhere and just hates factories and suffers, you know, he gets like a pain in his stomach whenever he thinks about the steel industry, right? And the more the steel industry produces, the more painful it is for this activist to think about the steel industry. Well, that's a negative externality, right? There's somebody else, there's some, you know, Ayn Rand when she was riding Atlas Shrugged, you know, she got a positive thrill thinking about the steel industry, right? So that's a positive spillover, right? Maybe the steel plant is very nice looking. It's a cool modern design. People who like modern architecture get a thrill every time they drive by. That's a positive externality. Somebody else doesn't like, you know, in other words, it's sort of arbitrary which externalities are considered to be relevant for the analysis and which are not. You know, imagine that you could actually measure all of them. Imagine that we actually had some way of knowing what they all were. We might find that, well, yeah, if we force the steel industry to pay a tax to compensate the farmers, that would shift up the supply curve and the equilibrium quantity would fall from QP to QS. But if we took into account Ayn Rand and all the Ayn Rand fans who get great benefits from thinking about steel and steel production, by the way, remember, we're not talking about the pecuniary benefits. We're not talking about the benefits that you and I get from being able to have a car that's made of steel. That's all priced out in the price mechanism. It's these unpriced benefits and costs that are relevant to this analysis. Right, but what if the, you know, what if the farmers only suffer a little tiny bit of damage, the negative externality is small, the positive externality that Ayn Rand fans get from thinking about steel is very large. Right, so if we could add that onto the demand curve and have the true social demand, the equilibrium quantity, when we take all the externalities into account, might actually be to the right of QP, rather than to the left. In other words, simply compensating for one externality while leaving other externalities uncompensated may push the market farther away from the social optimum, so to speak, than closer towards it. In other words, these are all second best solutions. The optimal solution in which every single externality is taken into account is not feasible. So we might actually be making things worse rather than better by taxing the steel industry and giving the money to farmers, okay? Another problem is even if you buy this analysis entirely, you're saying, well, the real market is not as good as the hypothetical market in which all externalities are taken into account. Therefore, so here's the way it typically works in the classroom. The professor presents this model and says, well, obviously an unregulated steel industry is gonna produce too much steel that's socially inefficient. The remedy is for the government to tax the steel industry and give the money to farmers. Okay, next topic, the professor immediately goes on to the next chapter in the book. You might say, well, wait a minute. So tell me how is this actually gonna work? So you're gonna set up a government agency like the IRS or some steel industry regulator that is not staffed by angels or angelic beings, right? But is staffed by human beings who make mistakes, right? Who might be selfish and greedy just like the steel producers, could be corrupted, could be captured by the steel industry. There's lobbying and bribery and so forth. How do we know that this real world government agency rather than correcting for the externality is not just gonna line its pockets or be totally corrupt and actually make the situation worse? In other words, what these kind of analyses do is they compare the real steel market to the perfectly competitive steel market, which is just imaginary and exists on the blackboard. They say the real world steel market is not as good as the imaginary perfect steel market, therefore the government needs to intervene. But remember, the government that intervenes is the actual real world imperfect government, not the hypothetical perfect government of the textbooks that just makes market failures go away and doesn't do any other harm, right? Even if you thought, yeah, in principle, it'd be good for the government to do this just for sort of public choice reasons, you might say, yeah, but empowering a government bureau to fix externality problems is creates way more problems than it solves. I think Walter Block might have used this term, the nirvana fallacy. The nirvana fallacy is comparing an actual unregulated market with a hypothetical regulated market and saying that the second is better than the first. You know, you gotta compare real world markets to real world markets. And even on neoclassical terms, the real world unregulated steel market might be more efficient than the real world steel market regulated by an imperfect government, okay? Something I'll get into a little bit later. Actually, Walter Block mentioned it. He's talking about Rothbard's view of pollution with the particles, right? I mean, some negative externalities are really torts or criminal acts, okay? I mean, if I went up to George here and just punched him in the face and I say, well, I like to punch. I watch MMA on TV. I get a lot of satisfaction out of doing this. Yeah, he's got a bloody nose. Hey, negative externality, that's how it goes. I wouldn't call that a negative externality. I would call that criminal assault, okay? So maybe the right way to deal with the farmers is to say, look, the factory, if the owners of the steel factory every night emptied the garbage, took all the garbage from their production process and just dumped it on the farmer's front lawn, we would say that's criminal trespass or we wouldn't say that's a negative externality, okay? So if the pollution is really damaging the farmer's property, then that's property rights violation, right? To use the language of externality is sort of misleading in that case. In other words, the problem is not that there's some inefficiency because the negative externality is not fully priced. Another problem is that the factory committed criminal trespass and this should be handled through the court system as a tort violation, as a tort or a criminal act, okay? So the bottom line here is that, look, I think it's not fruitful for us to say to our neoclassical economics cousins, well, there's no such thing as externalities. No, in fact, I would say, yeah, of course, externalities are everywhere. Most of them are not actionable. I mean, it's nice that you like the way I look and you get a little thrill every time you see me walking to the room. That's great, but I mean, it doesn't follow from that that I should somehow force you to pay me or whatever because there's some kind of inefficiency. Okay. So to reiterate the Rothbard point, externalities can be handled through tort law in property cases, right? If property rights are well-defined, so then you get to the question, well, I mean, is it a violation of the farmer's property rights or not? I mean, if you're a farmer and you're farming in the real world, you know the air is not pure. There are all kinds of stuff in the air. You chose to be a wheat farmer anyway. You know, if a little bit of pollution does some damage to your crop, well, that's just too bad. That's part of doing business. That's not a violation of your rights. So economists have grappled a lot with this question how do you define property rights in this context? So the most famous contribution from the neoclassical school is Ronald Kose's famous analysis of markets for property rights. It's worth mentioning this just a moment, right? So Kose's approach is that, look, according to Kose, it doesn't make sense to talk about cause and effect. Who caused the harm to somebody else? Yeah, the steel factory caused harm by polluting by putting smoke in the air, but the farmer caused the harm to himself by planting crops right next to a factory. So according to Kose, this is sort of a waste of time. We don't have to think about that. What we should think about is what arrangement of property rights maximizes value or well-being or something? If we assume that parties can bargain efficiently over different allocations of property rights, then maybe it really doesn't matter how the formal legal system, the courts, the constitution, statutory law, assigns these property titles to individuals. Maybe the initial allocation doesn't matter under certain conditions in terms of how property will be used. So here's an example that I use in my class that I think illustrates this point. Think about drones. So here's an Amazon drone delivering your Amazon package to your house, Amazon Instant or whatever, or maybe it's a drone doing something else, camera drone, whatever. Maybe I don't want a drone flying over my house. Maybe I don't want the flight path of the drone to go right over my backyard. I mean, if the drone's got a camera on it, I certainly don't want that. I've got my swimming pool back there or whatever, but even let's just say the noise from having drones fly over my house bothers me. I prefer peace and quiet. I don't want drones around. Well, I mean, is it a violation of my property rights for a drone to fly over my house? I mean, normally we wouldn't say, okay, there's a 747 flying 60,000 feet over my house. That's trespass, right? I should be able to build a wall, get Mexico to pay for it or whatever. A giant wall that goes all the way up to 60,000 feet and the airplane is going to smash into that wall. Most courts would say, look, sorry, you're entitled to a certain amount of space, but you can have 100 feet or 500 feet other than that, that's sort of public space. But if the drone is just skimming my rooftop, maybe that is a violation of my property rights. So how do we know? How do we pick a number? Here's the way Coase approaches that problem. He says, imagine sort of a two by two, imagine we interact two different dimensions. So in the columns here, I depict two different legal regimes for assigning property titles to the space above your house, okay? So you can imagine one scenario in which the courts say that the government says, you have the right to own the air above your house all the way up to some 100,000 feet or something. If anybody wants to fly over your house, they have to get your permission, otherwise they have violated your property rights just as if you drove your car through my front yard, okay? But you can imagine another institutional regime in which they say that, well, you know, 10 feet and above whatever, anybody can fly over your property if they want to, that's public airspace, okay? Now we can also imagine two different economic scenarios, right, one in which the highest valued use of the air above my house is for drones to fly through it. Meaning that, you know, I don't really care about the noise or there is no noise, I don't live there very often, it's like a storage unit or whatever, I really don't care if drones are flying above my house. And you know, I'm right on the flight path for the most efficient delivery system. So Amazon really wants to be able to fly drones over my property, the highest valued use of that space is for drone flights. But you can imagine another scenario in which maybe the drone delivery business isn't very profitable to begin with, there are lots of alternate routes, Amazon doesn't really care if they can fly over my house or not, and I really don't want any drones above my house, I like peace and quiet, okay? What would we expect to observe under these four different scenarios? Well, two of them are easy, right? If the drone operator has the legal right to fly above my house, and the most valuable use of the space above my house is drone flights, then we would expect if we just looked at Peter's house, you would see a lot of drones flying above my house, okay? Likewise, if drone flights are not very valuable to Amazon and I really like peace and quiet, we would expect that I will enforce my property claim or build a wall or whatever, and we wouldn't expect to see any drones flying above my house. But we still have two interesting, even more interesting cases to consider, right? Suppose that the law says I'm entitled to build a wall, okay, no drone can fly over my house without my permission, but in fact, I don't care if drones are flying above my house, they don't bother me, Amazon really wants to fly drones above my house, right? The fact that I have the legal right to prevent such flights does not mean that those flights won't take place. What's likely to happen? Amazon is just gonna knock on my door and say, hey, if we pay you a thousand bucks a week, will you let us fly these things over your house? And I'll say, yeah, I'd much rather have a thousand bucks than peace and quiet, I'll take that deal. Come up with some figure, Amazon could pay me or lease the flying rights above my house, and then they would fly their drones. Likewise, Amazon could have the legal right to fly above my home, but let's say I'm operating up some sort of health recovery clinic or something and having total silence or peace and quiet is critical to my business, right? I might pay Amazon, I say, look, you guys have the legal right to fly over my house, I'll pay you X dollars if you'll divert your drone somewhere else, and maybe we could come to some mutually agreeable price at which we're both better off. So the critical thing to see here, right, is that what determines whether or not drones will fly? That's the red print, or drones will not fly, that's the blue print. It's not determined by the columns. It's not determined by who has the formal property right, rather it's determined by what is the highest valued use. So according to Coase, if people are free to bargain over property rights, in other words, I can sell or lease you my property rights, or I can buy or lease from you your property rights, we would expect property rights to be allocated in such a way that property is allocated to its highest valued use, regardless of who is the initial legal owner, okay? One of my favorite examples of this, I don't know if any of you are from Chicago, you heard of the Wrigley rooftops? So this is the Chicago Cubs, this is Wrigley Field in Chicago, and the way the baseball stadium was built a hundred years ago, right? I mean, there's a street right behind it, and there are these three-story houses right behind it from what you can see into the baseball park, okay? So the owners of these houses started charging people admission to come and watch the game from the rooftop, and then they got clever and built little stands up there. So the Chicago Cubs is not making any money from these people who are watching the game for free from the rooftop of these houses on a neighboring street. And actually a few years ago, the Cubs filed an intellectual property lawsuit against the owners of these houses trying to get an injunction from the court to force them to take their stands down, granted they were benefiting from the Cubs logo and the Cubs brand without paying for it. But actually what happened was the owners of these apartment buildings and the Cubs negotiated a deal in which the rooftop owners would pay a fee to the Cubs. They would pay, it's 20 or 30% of the revenues they get from this, from seating, they'll pay that to the Cubs in exchange for which they get some licensing rights. They get to use the Cubs logo on some of the things that they sell. The point is, even if the courts were to say, oh, you can't do that, the Cubs legally can force you to take those stands down. I mean, if in fact people are willing to pay a lot to watch the Cubs, the Chicago Cubs organization, rather than shutting it down, would much rather let it continue but get a piece of the action. Okay, so you can negotiate, this can be resolved through peaceful negotiation without regard to the formal legal system saying you do have the right to set up those stands or you don't have the right to set up those stands. One more example that's near and dear to my heart. A few years ago, some clever entrepreneur came up with something called the knee defender. Have you guys heard about this? So this is a little gadget that you can, so when you're on an airplane, you're an economy class, right? You can stick this little gadget, you can wedge it into the seat in front of you and it prevents the person in the seat in front of you from reclining his seat. As you know, flying in coach is pretty tough, especially if you're tall like me. You hear that, Jeff Deist, you should fly me first class. Um. Um. And apparently, you know, so there's a lot of dispute and discussion about, you know, is it rude to lean back on the person behind you in economy or is it okay to lean back? And there's not sort of a clear, it's not clear who has the property rights to the little tiny bit of space in front of your knees on an economy class flight. And so some people travel with these knee defenders and they stick them in there. There have been cases of fistfights breaking out and planes having to do an emergency landing because of a bru-ha-ha among the passengers. And if you ask frequent travelers, they're equally split. I mean, some of them say, anybody who reclines their seat in coach is a complete a-hole. And there are others who say, hey, if I wanna recline, I'm gonna recline. That's my right. The seat will physically go back. I don't care that it smashes your knees. The point is, in principle, this could be resolved through private negotiation of the kind that Coach describes, right? Because if I'm sitting in coach and I'm trying to work on my laptop or whatever and some jerk in front of me, I believe you shouldn't recline by the way, but jerk in front of me reclines and I once had a computer broken because it cracked the lid on my computer when the guy leaned back. If I really want him not to lean back, I could just tap him on the shoulder and say, hey, look, buddy, I'll give you 20 bucks if you will put your seat back forward, right? And if, you know, or 50 bucks or 100 bucks, you know, if I'm like, I'm on my way to the Mises Institute and I've gotta give a presentation tomorrow and I'm not ready, I've really gotta get this presentation ready, it would be worth 100 bucks to me to be able to use that time to work on my presentation. If the person in front of me doesn't really care all that much, I mean, most of us would gladly take 100 bucks to put our seat back up, right? But if maybe I don't really care whether the seat's reclined in my face or not and the other person really wants to take a nap, you know, they wouldn't take the deal or if I have the knee defender and the guy in front of me really wants to take a nap, he can say, I'll give you 20 bucks to pull the knee defender out. Okay, in other words, in principle, you know, the question of who has the property rights to that space can be decided through negotiation rather than a default rule that is enforced strictly in every case. That's Coase's argument. Now, you may have heard the term the Coase theorem, the way Coase, the way this has been interpreted is something like this, you know, there's sort of a positive version. If property rights are tradable and parties can bargain efficiently, then the initial allocation of property titles does not affect resource use and value creation. This is sometimes stated a little bit imprecisely. Oh, well Coase says the initial allocation of property rights doesn't matter. It's a little bit more precise than that, right? I mean, it does matter in terms of who pays whom. So in that diagram I had with the drones, I as a landowner am not indifferent among the different property rights regimes. I prefer the one where I have the right to keep the drones away and if they wanna fly drones, they gotta pay me. Yeah, there's another world in which Amazon has the right to fly drones. I don't care enough to prevent it. So there are drones above my house, but I didn't get paid. But I prefer the first of those to the second. They're not the same, I'm not indifferent among them. But according to Coase's reasoning, you would still either have drones or no drones based on highest valued use, not based on the allocation of property titles, okay? There's sort of a normative version of this too, which is much more, which is trickier. This is something like, look, if it's unclear what the property rights should be, then the courts should allocate property rights in a way to maximize joint value. In other words, according to Coase, the judge should reason through, well, what would happen if property rights were tradable? Who do I think would have a higher willingness to pay? And thus end up with the legal rights to this property? Okay, I think it's party B, so therefore I rule that party B gets the property rights. In other words, if property rights are not tradable for some reason, the transaction costs of trade are too high, you can't get all the parties together, there's some bargaining problem, somehow the bargaining process breaks down, then according to Coase, the court should step in and impose what would have been the outcome if the parties could have bargained, okay? Now that's a problem, that's quite a bit more of a challenge. So in fact, we can enumerate a number of problems with this kind of reasoning. As I mentioned, maybe the transaction costs of bargaining are too high. You know, it's not just me and Amazon, it's Amazon and 5,000 owners of land over which drones might potentially fly. It's thousands of individuals whose health is made worse somehow because they're breathing in smoke. It might be not feasible for the factory to negotiate with all thousands and thousands of these persons who might be willing to cut a deal and pay the factory to reduce its emissions. There's also a question of what value means in this context, right? Walter Block has written quite a lot on this point that what Coase has in mind by value is some kind of objective cardinal measure of dollar wealth or something. So Coase would say, who is the highest valued user of the space above my land, whoever is willing to pay the most dollars for control of that space? If the two bargaining parties are Amazon and some hospital that is operating a health clinic where they might want things to be quiet, okay, yeah, then maybe the only relevant concept of value is dollar willingness to pay. But what if it's personal subjective value, right? What if I don't want drones flying above my house because I have some sentimental attachment to this property and this is where I met my wife when we were visiting this property and sitting out under the oak tree and looking up at the beautiful sky and that means a lot to me personally and having drones flying up there is gonna totally screw that up, right? But I'm poor, I'm not a business person, I'm just a consumer. There's no way I could afford to pay Amazon to divert its flights. But actually in terms of subjective value, keeping drones away might be the highest valued use. Okay, so Coase's analysis is really just about value that can be demonstrated in cash, not about ultimate or intrinsic subjective, sorry, intrinsic is the wrong word, not about subjective value, right, that may not be demonstrable in a market transaction, okay? Other problems to me, there are long-term distributional effects of how property rights are distributed. There's the prospect that the judge will get it wrong just like the government agency gets the tax wrong in the externality case. And empirically, it turns out that Coasean style bargaining seems to be exceedingly rare. In fact, what typically happens when parties are involved in some kind of dispute over legal rights to the use of some resource, they typically resolve it using kind of local custom, customary norms or practices, very useful book by Robert Elexson called Order Without Law, looks specifically at, it's almost like Coase's case with farmers and factories. In Coase's original article, his 1960 article, he used his illustration as farmers and ranchers. So ranchers raise cattle and the cattle can stray onto a neighboring, you know, wheat farmers land and damage the wheat. And Elexson went out and studied actual cases of disputes between ranchers and farmers and found that typically they resolve these things by appealing to community norms, not by explicit negotiation and side payments the way the Coase theorem predicts that these things would be resolved, okay? Let me speak just a moment about public goods. Public goods are defined as valuable goods and services that are both non-excludable and non-rival or rivalrous, meaning that, so a non-excludable good is one such that you cannot prevent people who don't pay for it from consuming it, okay? Like, you know, the sun. You can't charge money for sunlight because even somebody who doesn't pay the fee is still gonna get to enjoy the benefits of the sun. Right, a non-rival risk good is one that doesn't run out as it's consumed. In other words, multiple people can consume it at the same time. So according to your textbooks, right, that most of the things that we study in markets, clothes, food, flowers are private goods, meaning they're excludable. You can prevent non-payers from consuming. And they're rivalrous, meaning two people can't consume them at the same time without them being exhausted, okay? Some goods, so-called club goods, are excludable but non-rival. And some so-called common pool resources or common goods are rivalrous but non-excludable. But we'll focus on the fourth case, what are called public goods, are both non-excludable and non-rival. So for example, I had the picture on my opening slide of the lighthouse. The lighthouse used to be given in a lot of textbooks as an example of a pure public good. Paul Samuelson in a famous article on public goods used the lighthouse as an example. He said, look, all these ships are passing by and because there's a lighthouse, they can see the light, they don't crash on the rocks. So clearly it provides benefit to ships. But private entrepreneurs would not find it profitable to produce a lighthouse. Why? According to Samuelson, there's no way to make money from putting up a lighthouse. First of all, you cannot prevent a passing ship from benefiting from the light without paying for it. I mean, you can't turn the light on and off or beam in in a certain way. All ships get the benefit of the light whether they paid for it or not. Again, it's a non-rivalrous good, meaning that here's a ship over here benefiting from the lighthouse and here's a ship over here benefiting from the lighthouse. The fact that there's a ship over here does not reduce the benefit to the ship that's over here. So there's no way to make an economic profit by producing goods that are non-rivalrous and non-excludable. Therefore, according to the story, where do we get these goods? Of course, the government has to build them and provide them. So the role of government, according to this analysis, is to produce public goods that otherwise we wouldn't have. There are a number of difficulties with public goods arguments. First, what do rivalry and excludability really mean? Okay, so what does it mean to say that something is or is not rivalrous in terms of marginal discrete units? Right, so I mean a loaf of bread. It's a big old loaf of French bread, right? So Hunter and I, Hunter can take a bite out of this end and I can take a bite out of this end and let's say he's just want one bite of bread, now we're done, right? So does that mean Hunter taking a bite out of this end does not prevent me from taking a bite out of this end unless the bites get too close and then I'm gonna run away? Um. So does that mean bread is not rivalrous? Well, usually bread is considered an example of a rivalrous good because if he eats the whole loaf of bread, then there's no bread left over for me. What about excludability? So for years, another famous textbook example is radio broadcasts. Right, so they say, well, nobody would be willing to send out radio signals into the air because anybody with a receiving set can get the signal whether they paid for it or not. So how can you make money in radio? Right, so of course there's two obvious answers to that. One is entrepreneurs are often very good at coming up with clever ways to monetize the production of a public good, in the case of radio broadcast radio by advertising, right? The listener is not paying the radio station, but advertisers are paying the radio station for the right to advertise. But also these things are endogenous to technology. So I have Sirius XM satellite radio in my car, okay? It's beamed down from satellites and Sirius XM cannot prevent anybody from physically receiving those satellite waves if they want, but of course the signal is encrypted in such a way that if I don't pay my monthly fee to Sirius XM, it's just garbage. I can't interpret the signal, right? So, is something excludable or not? Well, it depends on the technology. A public broadcast may be not excludable, but cable TV is excludable. The Firewalled Wall Street Journal is excludable. Only people who pay can read the articles, okay? So it's not obvious that these are not sort of exogenously given categories. And of course, government provision really doesn't make any sense as it has its own drawbacks, right? So the first is a problem of demonstrated preference, right? How do we know that in fact the public good is a valuable good? How about a fireworks display? The theory is, well, no entrepreneur can profitably put on a fireworks show. Everybody likes to watch fireworks. Everybody would be willing to pay, say, five bucks to get to watch the show. But if you don't pay, you still get to watch it. So nobody's willing to pay, everybody will free ride. The seller can't make any money, no fireworks show, right? Well, I mean, everybody can say, oh yes, I love fireworks. I definitely benefit by $6.52 every time I see a fireworks show. I mean, that's just talk, right? How do we know that in fact, the benefits exceed the costs when according to the definition of public goods, these benefits cannot be demonstrated in action? So how do we know that it's valuable to have the public goods at all? You know, we can't make interpersonal comparisons of well-being to know who benefits by how much? And of course, you know, you could argue that the fact that if it's the case that nobody is, no private entrepreneurs are producing light house, producing fireworks shows, then maybe the market is telling us fireworks shows are not valuable. They're not valuable economic goods because they've failed the market test. There are lots and lots of case studies of things that the textbooks list as public goods, all of which have been provided and often are currently provided by private entrepreneurs, okay, just out of time. So the bottom line is that, you know, public goods are at best kind of theoretically interesting. What would it be like if you could, but I mean, they're really not relevant for policy, certainly not a good argument for government spending. You know, if you're interested in, you know, what's a more positive kind of Austrian welfare economics is not Pagoo and not Kos. You can read, here's some suggested readings. There's one more that I should have mentioned, Walter mentioned before lunch is Rothbard's 82 article called Property Rights, Externalities and Air Pollution, something like that, that ought to be mentioned as well. So to conclude, that's it. Thank you.