No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Thirteen: Market “Failure” and the Role of the Government 310 Social pressure is very effective at controlling behavior that the general public considers objectionable. Most business establishments refuse service to those not wearing shirts or shoes, even though for males there is no law requiring a shirt. Signifying your satisfaction with a good meal by a large belch may be socially acceptable in some parts of the world, but a young man on a dinner date with an attractive young lady will likely try to avoid the social penalty for that action! So how could this work with the toxins in the river? Social pressure could come about by protests by the people downstream to shame Stinky Steel into modifying its behavior. Further, if enough people were upset about it, even customers could face pressure if people knew they bought from Stinky Steel. You see protesters on numerous issues all the time; many times the business will modify their behavior to placate some interest group rather than have their name taken down. Nike has had numerous complaints over the years for its treatment of overseas workers, and it purports to have changed its operations in response. As an example of consumers being ostracized for buying a product with social opprobrium, ladies may not want to wear fur coats in politically correct circles. In part, these social protests are very useful; they provide information regarding the extent of negative utility produced by the externality. Stinky Steel may have some idea of the social cost it’s imposing on others by the extent of the protest. It can then balance this against the benefits that its products provide for consumers. It is important for us to constantly remind ourselves that we live in a fallen world; there is no utopian solution and there is no free lunch—there are only tradeoffs. Knowing the decision necessarily involves a tradeoff, we must press on to understand God’s will—WWJD? PUBLIC GOODS Externalities are not the only problem that inhibits the market’s ability to produce goods and services efficiently; some goods and services have characteristics that make market provision much more difficult. These goods are often called public goods since markets will tend not to produce them. Let’s illustrate the concept with an example. When I was a child, music was not ubiquitous (available everywhere)—no iPhones or anything. We thought 8-track tapes were high tech! When you went into the local diner or ice cream store they often had a “juke-box” in the corner, and you could put in a quarter and select several songs to be played. Everyone in the diner would get the benefit (or cost, if they didn’t like the song!) regardless of the fact that they didn’t pay for a song. If you wanted to buy a song, there would be no way to exclude non-payers from enjoying it as well. Further, your consumption of the song (listening) didn’t reduce the consumption of the song by anyone else. Because of this, you would only occasionally hear music on the juke-box; some patrons would never pay money for it, hoping that someone else would. Those people are called free riders . Public goods: goods that are difficult for the markets to produce efficiently, since they have attributes of non-excludability and non- rivalrousness. Free rider: someone who can benefit from another’s purchase of a product; the product once produced cannot be excluded from those who do not pay.