Are commercial partnerships between science and industry the best way to reduce GHG emissions?

Mar 19 08:17 2010 Sam Vaknin Print This Article

Environmental preservation is a public good.

If the reduction of GHG (Greenhouse Gases) is a public good,Guest Posting it should be provided mainly by the government (or by NGOs), possibly - but not necessarily - in conjunction with industry. If cutting emissions is essentially a commercial or private good, it is best left to market forces (firms, exchanges) with science merely providing guidance and input to agents and players.   It would seem that environmental goods are public goods.

Pure public goods are characterized by:

I. Nonrivalry - the cost of extending the service or providing the good to another person is (close to) zero.

Most products are rivalrous (scarce) - zero sum games. Having been consumed, they are gone and are not available to others. Public goods, in contrast, are accessible to growing numbers of people without any additional marginal cost. This wide dispersion of benefits renders them unsuitable for private entrepreneurship. It is impossible to recapture the full returns they engender. As Samuelson observed, they are extreme forms of positive externalities (spillover effects).

II. Nonexcludability  - it is impossible to exclude anyone from enjoying the benefits of a public good, or from defraying its costs (positive and negative externalities). Neither can anyone willingly exclude himself from their remit.

III. Externalities - public goods impose costs or benefits on others - individuals or firms - outside the marketplace and their effects are only partially reflected in prices and the market transactions. As Musgrave pointed out (1969), externalities are the other face of nonrivalry.

The usual examples for public goods are lighthouses - famously questioned by one Nobel Prize winner, Ronald Coase, and defended by another, Paul Samuelson - national defense, the GPS navigation system, vaccination programs, dams, and public art (such as park concerts). To this we should add mitigating the effects of climate change, cleaner air, and similar environmental goods.

It is evident that public goods are not necessarily provided or financed by public institutions. But governments frequently intervene to reverse market failures (i.e., when the markets fail to provide goods and services) or to reduce transaction costs so as to enhance consumption or supply and, thus, positive externalities. Governments, for instance, provide preventive care - a non-profitable healthcare niche - and subsidize education because they have an overall positive social effect.

Still, pure public goods do not exist, with the possible exception of national defense. Samuelson himself suggested [Samuelson, P.A - Diagrammatic Exposition of a Theory of Public Expenditure - Review of Economics and Statistics, 37 (1955), 350-56]:

"... Many - though not all - of the realistic cases of government activity can be fruitfully analyzed as some kind of a blend of these two extreme polar cases" (p. 350) - mixtures of private and public goods. (Education, the courts, public defense, highway programs, police and fire protection have an) "element of variability in the benefit that can go to one citizen at the expense of some other citizen" (p. 356).

From Pickhardt, Michael's paper titled "Fifty Years after Samuelson's 'The Pure Theory of Public Expenditure': What Are We Left With?":

"... It seems that rivalry and nonrivalry are supposed to reflect this "element of variability" and hint at a continuum of goods that ranges from wholly rival to wholly nonrival ones. In particular, Musgrave (1969, p. 126 and pp. 134-35) writes:

'The condition of non-rivalness in consumption (or, which is the same, the existence of beneficial consumption externalities) means that the same physical output (the fruits of the same factor input) is enjoyed by both A and B. This does not mean that the same subjective benefit must be derived, or even that precisely the same product quality is available to both. (...) Due to non-rivalness of consumption, individual demand curves are added vertically, rather than horizontally as in the case of private goods".

"The preceding discussion has dealt with the case of a pure social good, i.e. a good the benefits of which are wholly non-rival. This approach has been subject to the criticism that this case does not exist, or, if at all, applies to defence only; and in fact most goods which give rise to private benefits also involve externalities in varying degrees and hence combine both social and private good characteristics' ".

The Transformative Nature of Technology

It would seem that knowledge - or, rather, technology - is a public good as it is nonrival, nonexcludable, and has positive externalities. The New Growth Theory (theory of endogenous technological change) emphasizes these "natural" qualities of technology.

The application of Intellectual Property Rights (IPR) alters the nature of technology from public to private good by introducing excludability, though not rivalry. Put more simply, technology is "expensive to produce and cheap to reproduce". By imposing licensing demands on consumers, it is made exclusive, though it still remains nonrivalrous (can be copied endlessly without being diminished).

Yet, even encumbered by IPR, technology is transformative. It converts some public goods into private ones and vice versa.

Consider highways - hitherto quintessential public goods. The introduction of advanced "on the fly" identification and billing (toll) systems reduced transaction costs so dramatically that privately-owned and operated highways are now common in many Western countries. This is an example of a public good gradually going private.

Books reify the converse trend - from private to public goods. Print books - undoubtedly a private good - are now available online free of charge for download. Online public domain books are a nonrivalrous, nonexcludable good with positive externalities - in other words, a pure public good.

Environmental  goods require an initial investment (the price-exclusion principle demanded by Musgrave in 1959 does apply at times). Nor is strict nonrivalry possible - at least not simultaneously, as Musgrave observed (1959, 1969). Our world is finite - and so is everything in it. The economic fundament of scarcity applies universally - and public goods are not exempt. This is called "crowding" and amounts to the exclusion of potential beneficiaries (the theories of "jurisdictions" and "clubs" deal with this problem).

Nonrivalry and nonexcludability are ideals - not realities. They apply strictly only to the sunlight. As environmentalists keep warning us, even the air is a scarce commodity. Technology gradually helps render many goods and services - including, hopefully, environmental ones - asymptotically nonrivalrous and nonexcludable.

Bibliography

Samuelson, Paul A. and Nordhaus, William D. - Economics  - 17th edition - New-York, McGraw-Hill Irian, 2001

Heyne, Paul  and Palmer, John P. - The Economic Way of Thinking - 1st Canadian edition - Scarborough, Ontario, Prentice-Hall Canada, 1997

Ellickson, Bryan - A Generalization of the Pure Theory of Public Goods - Discussion Paper Number 14, Revised January 1972

Buchanan, James M. - The Demand and Supply of Public Goods - Library of Economics and Liberty - World Wide Web: http://www.econlib.org/library/Buchanan/buchCv5c1.html

Samuelson, Paul A. - The Pure Theory of Public Expenditure - The Review of Economics and Statistics, Volume 36, Issue 4 (Nov. 1954), 387-9

Pickhardt, Michael - Fifty Years after Samuelson's "The Pure Theory of Public Expenditure": What Are We Left With? - Paper presented at the 58th Congress of the International Institute of Public Finance (IIPF), Helsinki, August 26-29, 2002.

Musgrave, R.A. -  Provision for Social Goods, in: Margolis, J./Guitton, H. (eds.), Public Economics - London, McMillan, 1969, pp. 124-44.

Musgrave, R. A. - The Theory of Public Finance -New York, McGraw-Hill, 1959.

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About Article Author

Sam Vaknin
Sam Vaknin

Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East as well as many other books and ebooks about topics in psychology, relationships, philosophy, economics, and international affairs.

He served as a columnist for Central Europe Review, Global Politician, PopMatters, eBookWeb , and Bellaonline, and as a United Press International (UPI) Senior Business Correspondent. He was the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Visit Sam's Web site at http://samvak.tripod.com

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