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Friday fun quiz: What is a public good?

Anyone who has followed the CAP debate this past few years will have observed how the term ‘public good’ has been adopted by almost everyone seeking to advance their own vision of the CAP, from the dinosaurs of COPA-COGECA, to the more moderate National Farmers Union to the José Bové’s Via Campesina, organic farmers like the Soil Association, food policy wonks like Sustain and the Food Ethics Council, and of course the various environmental groups from where the public goods idea orignally hailed.

For years, environmentalists like Birdlife and WWF have been talking about the role of environmentally-friendly farming in securing clean water, healthy soil, wildlife and the like. These are outputs of farming that tend not to be traded in the way that beef, wheat and milk are traded. Environmentalists referred to these things as ‘public goods’, drawing on a economic concept that was first developed by Paul Samuelson in The Pure Theory of Public Expenditure (1954) and that will be familiar to anyone who has taken an undergraduate course in microeconomics. Their argument is that public money should be targeted at farmers who provide ‘public goods’, and that this would require root and branch reform of the CAP. As it stands, the CAP is aimed at a distinctly ‘private good’ in the form of a social welfare policy for farmers.

With everyone jumping on the public goods bandwagon, and the Commission announcing its own work plan looking at public goods in farming, and seeing as it’s a Friday afternoon, I thought I’d brighten things up with a little quiz to test your knowledge of what is, and what is not a public good.

Should your first year undergraduate microeconomics be a little shaky, there’s a nice definition over here. But I recommend taking the test without first reading the definition. Come back for the answers and discussion next week.

1. Which of the following is a public good?

a. A lighthouse that warns ships of underwater reefs
b. A harbour wall that protects ships from storms
c. A lifeboat that saves shipwrecked sailors
d. All of them
e. None of them

Answer: a. The light from a lighthouse is definitely non-rival and probably non-excludable, although it could be that vessels are charged a ‘license fee’ for going to sea and this could be used to finance lighthouses etc.

2 (i) In July 2008, who wrote that “food is a global public good”?

a. Mariann Fischer Boel – European Commissioner – Agriculture & Rural Development
b. Michel Barnier – French Agriculture Minister
c. Gordon Brown – Prime Minister of the UK
d. Louis Michel, European Commissioner – International Development.
e. Pascal Lamy, Director General of the WTO.

Answer: Louis Michel and Mariann Fischer Boel.

2 (ii) Do you think he/she has a good command of basic microeconomics, or not?

Answer: It would appear as though both Commissioners have a shaky understanding of public goods. Food is clearly rival and excludable, and definitely not a public good.

3. The English Lake District is widely regarded as a beautiful pastoral landscape, worth preserving from the ravages of intensive agriculture and saved from land abandonment. It is one of the UK’s top tourist destinations. Taking into account the theory of public goods, which is the most appropriate policy response?

a. Farmers in the Lake District should be paid to practise environmentally-friendly farming, with the money coming from general taxation.
b. Farmers in the Lake District should be paid to practise environmentally-friendly farming, with the money coming from a new Lake District tourism tax (e.g. tax on hotel beds and/or a national park entry fee).
c. Introduce laws that require farmers to practise environmentally-friendly farming without any payment.
d. Leave it to local farmers and local businesses and environmentalists to come to a voluntary agreement.

Answer: The principal benefits of a beautiful Lake District landscape accrue to those who live there and those who visit on holidays, though there may be some people who think they gain benefit from the very existence of the Lake District, even though they’ll never visit (they might like to know that the land that gave us Wordsworth’s poems is still as it was in his time, they may enjoy looking at photographs or paintings of the Lake District).

Option a. involves the largest redistribution as most of the people who pay will not directly benefit from the policy. It involves a transfer from the national population to the farmers who manage the land. Option b. makes a closer link between those who benefit and those who pay and represents a transfer from those who visit the Lake District and the farmers managing the land. Option c. involves a transfer from farmers to those who live and visit the Lake District although it has a lot in common with conservation requirements in towns and cities where the burden of compliance falls on the property owner. Since it is hard to exclude people from enjoyment of the landscape, option d. presents free-rider problems is likely to result in less conservation than is socially optimal.

4. If they get out of control, animal diseases (such as BSE and foot and mouth disease) can wreak economic havoc and even cost human lives. Taking into account the theory of public goods, measures to prevent animal disease outbreaks, tackle them when they occur and safeguard the safety of food should…

a. Be run by government and paid for by general taxation.
b. Be run by government but paid for by a sales tax on meat and livestock products.
c. Be run by government but paid for by a tax on livestock farmers.
d. Be run and paid for by farmers and producer organisations.

Answer: Due to problems of collective action and free-riding, Option d. is likely to result in insufficient safeguards and insufficient contingency funds for managing a serious outbreak. Options b and c are equivalent, although option b. may differ by also involving a tax on imported meat, which may be considered discriminatory and an unfair barrier to trade. Option a. involves the largest redistribution and does not create any additional incentives for farmers to take measures to contain the costs of animal disease. Option c is probably preferable from the perspective of economic theory as it operates rather like a private insurance policy, where the tax is the policy premium and the government is the insurer.

5. Economics jargon-busting bonus question: Which of the following economic concepts is NOT usually relevant in the analysis of public goods:

a. Free rider
b. Moral hazard
c. Tragedy of the commons
d. Externality
e. Market failure

Answer: Moral hazard.

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