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Public Goods and Private Bads.

datePosted on 11:14, October 20th, 2011 by Pablo

Much has been written about the difference between public goods and private goods, including issues of fungibility versus liquidity in the allocation of each (public goods are fungible rather than liquid, private goods can be both. Fungible means that something of worth can only be replaced in-kind, in a largely 1:1 transaction. Non- fungible or liquid means that the item can be exchanged for something else of different worth/value)). Less attention has been devoted to the issue of public and private bads, including the responsibility of the state in addressing each. In light of the disasters that have befallen NZ in the last year, it is worth pondering the latter.

The Pike River mine disaster is an example of a private bad. It was human caused, being the result of bad management decisions and poor safety standards within the mine, and affected its employees and profits. However, its impact on the public good was minimal. Even so, lax mine inspection regulations contributed to the explosion and loss of life, which is a public bad because state inaction facilitated the collective tragedy, and the adverse economic impact of the mine’s closure on the local community is also a public bad because it negatively impacts on the community through no fault of their own. The question is, what role does the state have, other than the policing in the aftermath of the event, in addressing the public bad aspects of the disaster?

The Christchurch earthquakes are clearly a public bad. The combined into a prolonged natural disaster, largely unforeseen. The government mobilised resources to address the aftermath, efforts that are still ongoing. But is there a private bad element to the quake? Did shoddy construction contribute to the loss of life and property? Were regulatory loopholes exploited that exacerbated the impact of the quakes, and if so, what is the state’s role in rectifying those areas in which standards and procedures were skirted. Is it a matter for the industries involved to resolve privately? What happens when private insurers renege on coverage or attempt to minimise payouts? Does the state have a responsibility to cover the difference in the public interest? Or is that purely a private matter?

The Rena shipwreck is most interesting because it clearly combines the two forms of bad. It started out as a private bad caused, apparently, by gross human error. National’s response was predictable: it waited for the parties to the contract of the vessel to negotiate a response. And waited. After four days of calm weather and no private response, a storm blew through and began to break the ship apart, spilling part of its load and fuel from ruptured fuel lines. When leaked oil and containers began to hit Bay of Plenty beaches, the disaster became a public bad, at which time the government belatedly intervened, mostly in a support rather than in a leadership role. This is due to its continued preference for the contracting parties to assume the responsibilities incumbent upon them for having caused a private bad with public ramifications. Meanwhile the environmental impact of the wreck continues to grow, with the costs of the clean up rising and the negative economic impact on local businesses likely to be significant in the measure that the spill is not contained promptly and the clean up process stretches into months. 

In other words, a private bad caused a public bad with private bad implications. Since the National government believes in the primacy of the market and private sector, it has left the bulk of the response to the parties involved, and called for volunteerism (another private act) in its approach to cleaning the beaches.

All of this is quite predictable. The quest for privatisation of the public sphere over the last two decades has reduced the concept of public goods and bads while expanding that of private goods and bads. Left to their own devices in a deregulated public space, private actors will minimize costs and increase risks in the pursuit of profitability. Should an accident such as Pike River or Rena occur, the payouts involved are considered to be acceptable given that they will be less than the costs of compliance in a tightly regulated commercial environment. The calculation is that the costs of occasional “one-offs” (which are not) will be less than the costs of ongoing regulatory compliance. In coal mining and shipping, accidents are not occasional happenstances but regular occurrences so the industries involved are have prepared accordingly (by establishing contingency funds for such events). The difference is that when a private bad becomes a public bad, they have limited contractual responsibility in addressing the latter. It is up to the state to recoup the costs of the public side of the bad incurred, which means taxpayers will have to foot the bill for the legal expenses involved in the court cases taken against the private parties responsible. In some cases–Pike River looks to be one–the state will do nothing of the sort because the public bad aspects are considered to be small, incidental, and not worth prosecution.

It appears that in the rush to privatise sight was lost on the potential public bad caused by private bads. Commercial de-regulation in the pursuit of competitiveness and trade ignores the fact that the private parties in contractual relationships with each other are not, by definition, responsible for the public good. As such, the public bad potential of a private bad event is discounted, in part because private parties know that governments will be loathe to charge them the full costs of a public bad response less they  be seen as anti-business. In an age when the private sector rules over the public interest, few governments will be courageous enough to incur the wrath of major commercial actors regardless of the latter’s responsibility in causing a public bad.

The problem is compounded by the hollowing out of state regulatory agencies, particularly in their operational capabilities as well as their policy scope. Insufficient regulatory enforcement (such as it is) due to reductions in state regulatory agency workforces, combined with reductions in quick response assets in agencies responsible for disaster relief and mitigation, force the state to contract out the latter in an environment made riskier by de-regulation. Since the skill sets required for disaster relief are often very specialised and limited, given the geographic and logistical difficulties presented by specific scenarios in the time-sensitive context in which the public bad occurs, this places private actors with such skills in a de facto monopoly position over the response in their areas of expertise. This allows them to extract monopoly rather than market rents from the state when contracting such assignments.

The private bad-focused approach can be seen as short-sighted in the measure that de-regulation facilitates private actor irresponsibility, which in turn leads to higher costs for the state in the event that a private bad becomes a public bad. Seen another way, robust state regulation of private industries with potentially injurious public consequences may in fact be more of a cost-savings over the long-run given the inevitability of private sector accidents that negatively impact on the public good.

This is the crux of the matter, and it is the one that should be reflected upon when issues of off-shore drilling, mining, nuclear energy and other private industrial ventures with potentially public bad implications are discussed.

 

7 Responses to “Public Goods and Private Bads.”

  1. James on October 20th, 2011 at 12:02

    Public goods and bads only exist in the absence of well defined property rights. If, for example, the foreshore/seabed/coastline was outright owned by Maori groups or tribes, a large part of the costs of the oil spill would fall on those groups – as those groups are private, there would be little or no public bad. What this suggests is that your comment,

    “It appears that in the rush to privatise sight was lost on the potential public bad caused by private bads”,

    ignores an important effect of privatization: expanding the sphere of private property rights decreases the opportunity for private interests to shift the costs of their activities onto the public (i.e. reduces the opportunity for public bads to occur). This doesn’t mean the costs disappear, but it does mean that insofar as private entities are more likely to pursue those that harm their interests, those in a position to harm others are more likely to reconsider their actions, contrary to your comment,

    “But such an approach can be seen as short-sighted in the measure that de-regulation facilitates private actor irresponsibility”.

  2. Pablo on October 20th, 2011 at 12:21

    James:

    Your point is noted. It goes without saying that the public/private distinction is founded on the existence of private property rights, although even where pervasive it leaves room for public space, the area in which the state supersedes mere private interest in pursuit of the common good.

    The trouble with your argument is that while neat, it ignores the fact that the extension of the private domain allows private actors to transfer costs of doing bad to other private actors that are weaker than they are. Since recovering said costs involves litigation between the parties, those with deeper pockets and political influence will prevail more often than not. That is not justice, and is thus inimical to the public trust–in other words, in the measure that stronger private interests can shift the costs of doing bad onto weaker private interests and prevail in litigation, then public confidence in the judicial system as a means of equitable and fair redress is undermined. That may be the norm in authoritarian systems where no presumption of justice obtains, but in a democracy it is a public bad.

  3. James on October 20th, 2011 at 13:06

    Yes, there will always be public goods insofar as there are some things that, largely for practical reasons, cannot be effectively privatized (e.g. the air, ocean waters, migratory animals, etc..).

    WRT your second point: that’s a more general problem; it’s not unique to public goods-turned-private goods.

    Monopoly power over the justice system is not a public bad, however, as you suggest. It is more properly considered a market failure, which can be addressed by government intervention, although the intervention may not be any better (as an economist, I’m using “better” in the “more efficient” sense, here) than the market outcome. We’d really have to make that judgement on a case-by-case basis.

    I’m not sure what to think about your”public confidence in institution X is a public good” claim. I’ll have to ponder that carefully.

  4. Pablo on October 20th, 2011 at 14:25

    James: public trust in the institutional apparatus is a fungible good.

    DeepRed: I lost your comment in the spam fliter. Feel free to re-post.

  5. Dan on October 21st, 2011 at 10:49

    I agree with the points made in the OP but it took so long to say them, just a tad weighty.

    There had to be a better way to say this with less words.

  6. ak on October 21st, 2011 at 22:30

    Twenty-nine brave souls in a cold dark crevice

    Their kin’s blood-tinged tears that will never abate

    The price of every and all, vote-sucking device

    From the whores of the rich, and the mongers of hate.

  7. Bill on October 22nd, 2011 at 15:58

    Responsible stewardship by the private sector is always going to be unlikely because they can just pack up and walk away through bankruptcy if their gambles with the public good go wrong.
    The idea that increasing private ownership decreases the opportunity for cost shifting is nonsense. Our privatised economy is designed to allow private owners to cash in on the goods for themselves and pass on the bads to the public – and thats exactly what they do all the time in areas like finance, the environment, infrastructure, health and safety, employment or anything else you can think of.

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