Public vs. Private Provision of Information Yale Braunstein March 2008

Outline  Origins of the state  Reasons states invest in infrastructure  User fees for state-provided goods & services  Public goods, economic efficiency, etc.

Origins of the state  Divine ordinance (the king carries out God’s will)  Naked power (ability to seize and hold power)  Instinctual-biological (people desire to form communities)  Voluntary contract (“social contract” a la Locke, Hobbes, Rousseau)

Reasons states invest in infrastructure  “Infant industry” arguments (go back at least to John Stuart Mill)  R&D is risky (state is more able to bear risk than private entities)  Diffuse benefits & beneficiaries  Foreign trade/competitive advantage  Military/national defense  Expanded to included Interstate highway system (Autobahnen)  Role of OMB Circular A-76OMB Circular A-76

A-76 “Government Make or Buy” Policy: The longstanding policy of the federal government has been to rely on the private sector for needed commercial services. To ensure that the American people receive maximum value for their tax dollars, commercial activities should be subject to the forces of competition.

User fees  Only 3 basic ways to deal with excess demand  Make more  Ration  Set prices  Authority from OMB Circular A-25 & A-76A-25  But these have problems in the “real world”  Especially for information products & services (?)

A-25 “User Charges” General policy: A user charge, as described below, will be assessed against each identifiable recipient for special benefits derived from Federal activities beyond those received by the general public. When the imposition of user charges is prohibited or restricted by existing law, agencies will review activities periodically and recommend legislative changes when appropriate.

Public goods, economic efficiency, etc.  Externalities  Markets & market failures  Public goods

Externalities  Formal definition: Consumption or production of good A changes costs or benefits associated with good B  2x2 classification scheme: cons vs. pdn, positive vs. negative  Specific examples:  Bees & honey  Jewelry production  Possible solution: Impose excise tax or effluent charge (or use subsidy)

Other “solutions” to externalities  Taxes & subsidies  “Internalize” the externality via merger, regulation, etc.  Define property rights and allow bargaining & negotiation  Coase’s Theorem (again)

Market Failure  Alternate “definitions”:  “The condition where the allocation of goods and services by a market is not efficient.” –See Bator’s classic article, "The Anatomy of Market Failure," Quar. Jour. Econ. (August 1958).  More loosely: “The market did not give the result I wanted.”

Causes of market failure  Monopoly  Public goods attributes  Non-exclusivity: difficulty in excluding non-payers  Non-rivalry: low (or zero) marginal cost to serve an additional user  Pure examples:  Broadcasting, fire protection, mosquito abatement  Less-than-pure examples:  Immunization, literacy, public roads, light houses

Implications for information policy  Appropriate role of the government in direct provision of information  Appropriate role of the government in direct provision of infrastructure  R&D  Role of government labs  Role of tax incentives