GCC Students for Liberty

by Dave Gernhard

A major aspect of public goods theory is the idea of nonrivalrious consumption. This refers to cases where an “individuals’ ability to consume a good or service is not diminished by allowing additional individuals to consume it.”[i] Some simple examples of this are movie theaters or sports arenas. The cinema can admit extra people without any increase in the cost of their operation. Unlike externalities, these nonrivalrious goods are easily excludable making it harder to understand why people would claim they are part of the Public works doctrine.

What government advocates argue is that since additional consumers can be added with no additional cost, these marginal consumers are “inefficiently” excluded from consumption when the price of the good is higher than their value scales. Due to the inability of knowing exactly what value the marginal consumer has for the good, the private market would exclude far too many people. It is more “efficient,” argue the proponents of big government, that the government simply supply these goods and services at the marginal cost. More people will benefit with no additional cost on the producer.

This neoclassical view of efficiency diminishes the importance of the individual. It is essential that one start at the beginning for the conclusions to be sound. That beginning is this: that people act by apply means, according to ideas, to achieve ends. Individuals subjectively judge their actions as successes or failures. What then is efficiency in light of subjective failures or successes in the individual’s plans?

In the article “The Austrian Theory of Efficiency and the Role of Government” published in The Journal of Libertarian Studies, Roy Cordato writes that efficiency in purposeful behavior is choosing means that attain certain goals.[ii] Conversely, inefficiency is using means that don’t work towards individuals goals. That being the case, it is impossible to see “societal efficiency” as apart from the efficiency of the individuals. Austrian Economist Israel Kirzner writes that

Society is made up of numerous individuals…It is therefore unrealistic to speak of society as a single unit seeking to allocate resources in order to faithfully reflect “its” given hierarchy of goals. Society has no single mind where the goals of different individuals can be ranked on a single scale… Efficiency for a social system means the efficiency with which it permits its individual members to achieve their several goals.[iii]

It is a limited government that allows individuals to pursue their goals in the most efficient manner available. Taxing the citizens to provide for nonrivalrous goods at the marginal cost doesn’t help the individuals be more efficient. Society is in no way made more efficient by the subsidization of nonrivalrous goods and services.

By starting at the beginning, one is able to deduce that inefficiencies in society are a result of government intervention in the market process. Kirzner went on to write that:

Interference with the webs and forces that are woven through the market process limits the attempts of participants to coordinate their activities through an engine of remarkable efficiency – the market. The analysis of the market prices can clarify the costs involved through such interference, making it possible for market participants to decide, through the political process, on the extent to which they are willing to lay aside their engine of efficiency for the sake of special purposes of possibly overriding importance.[iv]

Kirzner is making two different claims here. He first makes the point that government interference cannot be justified by increased efficiency because only the market process and price system allows everyone the freedom to pursue their subjective ends. In the second half of this statement, after establishing the inefficiency of governmental action, Kirzner adds that there can be other reasons a political body could act, but that it is always at the cost of efficiency.

What at first appears to be a legitamate complaint against the free market is shown to be nothing more than a poor understanding of efficiency. The collectivist is eager to ignore the role of the individual, looking too quickly at the unfilled seats in a theater as market failure. A more proper understanding is that unfilled seats are signs of market success because individuals are choosing not to apply their means to that end. The theater may not even be the most efficient use of resources in the first place. (Perhaps the individuals of society would have preferred a bowling alley?) Only the market system, that allows theaters to go out of business, can bring efficiency to society. Empty seats illustrate the flexibility of the market order in allowing individuals to pursue their own goals in the most efficient ways possible.

[i] Cowen, Tyler. “Public Goods and Externalities: Old and New Perspectives.” The Theory of Market Failures. Tyler Cowen ed., Fairfax, VA. George Mason University, 1988.

[ii] Cordato, Roy E. “The Austrian Theory of Efficency and the Role of Government.” The Journal of Libertarian Studies, Vol. IV. No.4 1980. pg 394

[iii] Kirzner, Israel, Market Theory and the Price System. Princeton, N.J.: D. Can Nostrand Co., 1963

[iv] Ibid., p. 309

Tags: austrian economics, capitalism, Communism, efficiency, market efficency, nonrival, nonrival goods, nonrivalrous goods, pubic goods theory, public goods, public works