We saw in the previous post that some types of market exchange involve negative externalities. People who were not a party to a transaction end up bearing part of the cost … the costs “spill over” on to them. But there are also cases of positive externalities. In these instances, the market exchange benefits not only the parties involved but those who were not a party to the transaction.
James Halteman, in The Changing Worlds of Economics and Faith, invites to consider the consumption of a loaf of bread. If I eat a loaf of bread, I alone get the nutritional benefit of eating that bread. Now imagine world where each time I eat a loaf of bread, all my neighbors are nourished as well. This is, of course, absurd with regard to bread but consider what happens in other facets of economic life where my benefits “spill over” to my neighbors.
I live in the heart of America’s Tornado Alley. Halteman uses the example of storm-warning devices. If I install a storm-warning device to protect my family, then certainly my family will benefit from such a device. But so will all my neighbors who invested nothing. So from an economic standpoint is it economically prudent for me install my own storm-warning system? Maybe I should wait for one of my neighbors to install one and get the benefit of their expenditures. Of course, all my neighbors are doing the same. In these instances, it is better to levy a tax in support of providing these services so that no one has to unfairly bear costs of services that benefit the whole community.
In reality, a great many of the goods and services we buy probably have some spillover effect. The question is the matter of degree. For instance, if I get an education there are almost certainly going to be financial benefits that accrue to me alone. However, as Halteman points out, our complex post-industrial society requires people to be able to read, to do basic math, to understand our civic structures, to manage personal finances, and to have a variety of other life skills. Each time you send an email or publish an advertisement you benefit from my ability to read. Therefore, we provide public education and require people to achieve a certain level competency. People can choose to use the public option or not but the goal is to be sure everyone has a minimal standard of education.
There are a number of other examples where goods or services a publicly provided due to positive externalities: military service, police and fire protection, garbage collection, and communications. Of course, the big issue today is health care. Certainly there are positive spillovers for me from you being healthy. But unlike basic education, for example, the cost of achieving health can vary wildly from person to person. Basic preventative care and treatment for common ailments may have some similar characteristics to public education but services beyond this can present profound challenges.
Some things, by their very nature, likely require a government approach to providing just and efficient services. Others appear to have a hybrid nature where a combination of government and market approaches may be required. We will have more to say in a future post about challenges of using non-market approaches to effectively address problems but for now it is enough to see that positive spillovers do occur and that in some instances we have decided to intervene in the markets to facilitate and expansion of those spillovers.