Friday, 15 April 2016

Paul Krugman should know better (updated)

At the Cafe Hayek blog Don Boudreaux writes,
During the course of the discussion one of my superb students, Chris Kuiper, mentioned in passing that Paul Krugman, in a recent New York Times column, mistakenly described safe drinking water as a public good. Here’s that column. Mr. Krugman emphasizes that safe drinking water is a public good according to “Econ 101.”
I don't think so. At least not back when I did Econ 101.

A public good is a good which has two properties, 1) non-excludable, which basically means if one person gets it then everybody get it and 2) non-rivalrous in consumption which amounts to saying the amount I consume don't affect the amount you can consume.

Now I don't think it will take to long for you to convince yourself that safe drinking water does not have these two properties. To take point 1), If water pipes go to my place but not to yours then I get water and you don't. Or if we pay for water and I pay the bill and you don't your water can be cut off. As to point 2) if water was non-rivalrous why are so many people worried about the amount of water used on farms, for example. If farmers could take all they wanted without reducing the water table their would be no problem. But we know they can't.

Safe water does, of course, have positive externalities that come with it, but this doesn't make it a public good. I'm guessing that what Krugman may be getting at is that safe water is a "merit good". The somewhat odd concept of a merit good was introduced by Richard Musgrave (1957, 1959). A merit good is a good or service which is judged that an individual or society should have on the basis of a norm other than respecting consumer preferences, ie the government forces you to have it. Or sometimes a merit good is thought of as a good which would be under-consumed (and under-produced) in the free market economy. There are, it is claimed, two major reasons for this: (1) When consumed, a merit good creates positive externalities. This means that the public benefit is greater than the private benefit but as consumers only take into account private benefits they will under-consume the good or service (and so it is under-produced). (2) Individuals are myopic, they are short-term utility maximisers and so do not take into account the long term benefits of consuming a merit good and so they, again, under-consume the good.

It could be argued that there are positive externalities in the form public health benefits from safe water and thus it is a merit good. But this doesn't make it a public good.

Krugman also claims education is a public good.
There should, however, be much less debate about spending on what Econ 101 calls public goods—things that benefit everyone and can’t be provided by the private sector. Yes, we can differ over exactly how big a military we need or how dense and well-maintained the road network should be, but you wouldn’t expect controversy about spending enough to provide key public goods like basic education or safe drinking water. (Emphasis added)
And again no. To take just condition 1) from above, you can clearly exclude people from education. But again there are positive externalities to education, so a merit good.

Krugman, who is after all the co-author of an Econ 101 text, should know all of this. He is getting very sloppy when discussing basic economic ideas.

  • Richard A. Musgrave (1957). "A Multiple Theory of Budget Determination," FinanzArchiv, New Series 25(1), pp. 33-43.
  • Richard A. Musgrave (1959). The Theory of Public Finance, pp. 13-15.
Update: Tim Worstall also makes this point.

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