In decentralized markets, public goods are under-provisioned because the private benefit to any individual of pursuing action is lower than its corresponding social benefit. There are instances with inverse dynamics: Companies that extract small fractions of money (substitute for anything valuable, like time) from each individual, which collectively amounts to a large sum when spread over millions of individuals. Subsets of the affected individuals do not have the necessary incentives to fight, and therefore such policies remain.

The world is full of examples of such abuses:

  • Agricultural companies with large amounts of clout can lobby Congress to increase import tariffs on sugar or dole out more subsidies. The combined effects of the import tariff and agricultural subsidies make high fructose corn syrup competitive with cane sugar (although it is a less efficient source of sugar). Individuals end up paying a dollar more per box of sugar, which is not a tragedy for any individual. But collectively sugar buyers are paying a significant surplus beyond a competitive equilibrium directly to domestic producers, not to mention through taxes to fund subsidies
  • AT&T recently started enforcing its tethering rules with its customers. Unhappy customers are encouraged to “vote with their dollars,” but where and how? Competitors are not much better, and the flight of a single customer is not going to make a difference.
  • A Congressperson from a certain state obtains funding for a pet project in his home state that will increase welfare by a fifth of the cost of the project (but that’s OK for him, because the costs are borne by other states!)

What remedies are there to this problem? For one, the threat of class action lawsuits have some effect on dissuading some, but only in cases of legal wrongs. Even then, the benefit for the plaintiff (and his lawyers) is lower than the costs of the incumbent system.

Other remedies are impractical in our system: The problem is with the nature of politics to favor groups. Asking Senators to stop picking favorites is hard. A solution would require structural changes to our legislative body so that no individual has an incentive to favor his own region at the expense of the nation.

One could presumably require members of Congress to prove that a proposal will cost the country less than it benefits it (taking into account all externalities), but how can we rely on the very members of Congress to honestly assess anothers’ proposals on that merit?

What solutions do you have?