Public Good Provisioning in the Modern Society - Case Study Example

Public good provision, punishment, cooperation, and defection Introduction Public good provisioning is a great concern in every country, given the problem of free riding which arises from the externality feature that the public good possess. One of the solutions to get rid of free riding problem is to promote cooperation for ensuring efficient provisioning of public good. Public good can generally be defined as the good that has the two important features of being non-rivaled and non-excluded. This simply refers to the fact that consumption of any public good by any one individual of the society does not reduce the accessibility of this good to the rest of the people living in the society. Along with it, in case of public good consumption, no one has the right to exclude some other individual from consuming the good. In practice, it would be difficult to find out such goods which are non-rivaled as well as non-excluded in an absolute term. However, economists generally think that although absolute non-rivaled and non-excluded goods are non-existent, there exist some goods which have the feature that approximate the concept of public goods. The paper addresses both the problems and necessity of public goods, generation of negative emotions owing to free riders and the necessity of punishments. Background In case of understanding the problem relating to the public good provisioning, it is necessary to build up clear understanding regarding public good. Some examples can be used here to understand the features of public goods and why it efficient provisioning seems to be so problematic. For the purpose of easy understanding let us consider the case where a person is drinking one glass of milk. Once he finishes his drinking there will remain no milk in the glass for the other person to consume. Therefore, any other person is getting excluded from consumption of the milk in the glass. Therefore, this one glass of milk is a rivaled and excluded good. In contrast, let us assume the case of breathing air. It is a well known fact that breathing air can not be reduced significantly by the consumption of it by some person. Therefore other persons can easily get access to this breathing air, and non one can be excluded from breathing. So, breathing air can be regarded as non-rivaled and non-excluded good. But there is no such problem in the provision of breathing air since it is a natural resources. No cost goes into its production. These are known as free goods. But thing is not same for all the non-rivaled and non-exclude goods. All public goods are not free goods. For a large set of public goods, huge amount of costs have to be incurred. However, since public goods are non-excludable and non-rival, price cannot be charged in the usual way for the consumption of these public goods. Here comes the question of efficiency. Private companies seem to be reluctant in providing public goods. Even if they provide these good, they would charge price in such a way that there profit gets maximized. Under such circumstances there would be under provisioning of public good. Along with it the very nature of non-rivaled and non-excluded can also not be maintained. This thing can be illustrated with an example. Suppose a private company has made a road in a remote village. A private firm always wants to maximize profit. In doing so, it will charge such a fee for all who use that road that, many people could not get access to that road. Therefore, under such a condition the road can no longer be sustained as a public good. Here comes the governmental role in providing public goods. Government provides public goods in such way that nobody can get excluded from the consumption of the good. How to finance those goods? Government generally does not impose direct charges for the use of the public good. But it has to be financed by the people living in the country itself. Government provides public good by using its monetary funds. And this monetary fund gets filled up by the contribution of the people living in the country. Government collects taxed from the individual to finance its spending. Therefore, the essence of the public good provisioning system is that although it is non rivaled and non-excluded, people have indirectly contribute to maintain the continuing provisioning of public goods in any country, but, this is the point where exists a number of problems like of free riding. Free-riding can generate negative responses from the individuals who are cooperating and sometimes the punishments are imposed even if they are costly with no material gains to the ones who are inflicting the punishment. The fear of punishment often makes the free riders cooperate in the long run. Therefore the provision of punishment needs to be present in order to make the free riders act positively due to fear of being punished, if not willingly. Relation to Game theory Game theory is the means of illustrating strategic decision making situations in mathematical terms. This may be applied in situations where the consequences of an individual’s decision depend upon the decision of others in the group and vice versa. In case of public goods more than one individual share the benefit of a particular good. However the contribution to its cost of provision might not come from all the participants who enjoy the benefit. Therefore a situation arises where a part of the group might want to contribute but the others will free ride. For instance, in case of zero sum games, one individual will benefit at the expense of the others. There are different concepts of equilibrium and one of the most popular is Nash equilibrium. This is based on the theory of Pareto optimality where none of the players can benefit by changing his own strategy if the other player keeps his strategy unchanged. This is mostly applicable in case of two or more players when all the players know each others’ strategies and the probable consequences. Again in case of non-zero sum games, often the practical solution reached is not the Nash equilibrium always. However repeated trials of the same process might end up in both the parties ending up cooperating with one another owing to the fear of punishment. However in case of the provision of public goods and free rider problem, there can be more than one party and different situations for which the strategy design should be different. (Aumann, 1987; Dutta, 1999) Introduction of a simple game Let us consider a simple game to illustrate the problem of public goods and free riding. The public good assumed here is the provision of street light in a small lane dwelt by two families who are rich but rivals and despite being neighbor they do not interact among themselves. The lane remains dark from the time of sunset and there is no urge from either side for establishing a light on the street because each of them does not want the neighbor to benefit at their cost. However they both complain to the municipality who provides them a possible solution where their decision making would lead to the final consequence. Each family’s head is inquired where they would like to contribute $500 each for the establishment of the light and a subsidized cost of around $50 per month for its maintenance. However if one of them denies then the other party can still enjoy the benefit of street light but the switch will be placed inside the premises of the house which pays the entire cost ($1000 plus $100 per month) and operated at their discretion. Thus if one denies to pay and the other agrees then the one who agrees will have to bear the entire burden. If both of them deny paying, then the municipality will provide the street light for two hours every evening and charge $100 from each side for the installation and $10 every month for maintenance. The following table may reflect the decision to pay and the game design: Payments by each family Family I chooses to cooperate Family II chooses not to cooperate Family I chooses to cooperate (-$500, -$500) ($0, -$1000) Family II chooses not to cooperate (-$1000, $0) ($10,$0) Note: the matrix has been designed to reflect the initial set up cost and the maintenance cost is assumed to be borne by the individual(s) who pay(s) Now let us illustrate the matrix which denotes their benefits: Benefit enjoyed by each family Family I chooses to cooperate Family II chooses not to cooperate Family I chooses to cooperate (NF,NF) (F, NF) Family II chooses not to cooperate (NF,F) (C,C) *NF: not free rider but full benefit; F: free rider but compromised benefit; C: forced cooperation and compromised benefit Since the families do not interact with each other, therefore none of them are aware of each other’s decision. Yet, no one would like the other to be a free rider of some good paid by him or her. In each case the head or the most elderly person in the family decides. It is a profitable option for both of them to opt for cooperation because they would get uninterrupted benefit of the street light which will be operated by both and the switch will not be built in anyone’s private premises. However if family I pays and enjoys full benefit, family II will have to sacrifice some of the benefit because it is likely that family I will not keep the street light on when it is not required by them. However the families being rivals will not want the other one to free ride anything whose cost is borne by him or them. It is most likely that both will choose not to cooperate and hence end up getting the light for two hours only (at the discretion of the municipality). Hence non cooperation is the dominant strategy. However Nash equilibrium would have been the cooperative strategy on both sides, but this is not necessarily the outcome unless the game is repeatedly again after three months (say). The experience suffered by the families might lead them to take a decision which will help them enjoy the light for the entire evening. Again, if one of the families decides to be a free rider and the other decides to pay then the later ends up bearing the entire burden. In the next period, to punish the other family the later might decide to be a free rider while the other family might learn from his experience (cannot enjoy the full benefit of the light) and agrees to pay (ends up paying $1000). In the next period both have learnt from their mistakes (fear of punishment by being kept away from enjoying the light even when it is urgent for them) and they both might agree to cooperate and end up in a state of Nash equilibrium. Therefore by the fourth stage of the game, Nash equilibrium might be reached. Literature review Researchers and scholars have continuously investigated this problem and different strategies to deal with this. While rewards and incentives are essential, so is the fear of punishment. According to Fehr and Gächter (2000a, p. 163) “Many societies face the problem of how to provide public goods. For a group of self-interested agents, of course, public goods present the difficulty that since all agents will want to be free-riders on the efforts of others; no agent will contribute willingly to the public good”. This conforms to the game model designed above but rational decision might lead to a cooperative strategy of win-win goal where the desired equilibrium is reached. Fehr and Gächter (2000b, p.981) suggest that “presence of punishment opportunities is irrelevant for the contribution behavior if there is no punishment.” In an experiment conducted by the authors it was seen that around 53 to 75 percent of the participants tend to be free riders in case of no punishment. In a condition where there is a provision of punishment the contribution on an average ranges from 50 to 95 percent of the total funds required. At the final stage the subjects end up contributing the whole endowment although a standard model of economics may indicate the strategy of non cooperation to be dominant. In instances of industrial outputs, team work and other such cases, provision for punishment helps a lot. The authors also sum up the main idea in their work, Fairness and Retaliation: The Economics of Reciprocity, saying, “Casual evidence as well as daily experience suggest that many people have a strong aversion against being the “sucker” in social dilemma situations. As a consequence, those who cooperate may be willing to punish free-riding, even if this is costly for them and even if they cannot expect future benefits from their punishment activities” (Fehr and Gächter, 2000a, p. 167) the authors have also studied the possibility of negative reciprocity in case of punishments in an explicit contract and positive reciprocity in a reward based implicit contract. The authors Gürerk, Irlenbusch, and Rockenbach, (2006, p.108) suggests, “Profound empirical evidence shows that the possibility of sanctioning norm violators stabilizes human cooperation at a high level, whereas cooperation typically collapses in the absence of sanctioning possibilities”. The authors design a two stage game where in the first stage the design is non- sanctioned while in the second stage there is sanctioning (rewards and punishments). The players are not aware of each other’s strategy and come to know his or her rewards and punishments at the end of the game. Concluding remarks From the above discussion therefore, it is clear that punishment is equally important along with rewards but the combination should be rightly adjusted so that there is no negative reciprocity instead of positive. If there is an appropriate sanctioning method used, we may end up devising a game where the entire fund of a public good is obtained through cooperation. The game designed is a simplification of real situations where after repeated trials and a process of learning, the players might end up taking an optimal decision. Devising a game is easy to understand the problem of free riding and the result often shows that a sanctioning method leads to better cooperation rather than a non-sanctioned one. Punishment without any material benefit to the punisher is often helpful in leading towards a desired equilibrium. References Aumann, R.J. (1987), "game theory,", The New Palgrave: A Dictionary of Economics, 2, pp. 460–82 Dutta, P. K. (1999), Strategies and games: theory and practice, MIT Press Fehr, E. & Gächter, S. (2000a). Fairness and Retaliation: The Economics of Reciprocity. Journal of Economic Perspectives, 14 (3), 159-181. Available at: http://www.iew.uzh.ch/wp/iewwp040.pdf (accessed on March 4, 2009) Fehr, E. & Gächter, S. (2000b). Cooperation and Punishment in Public Goods Experiments. American Economic Review, 90(4), 980-994. Available at: http://www.iew.uzh.ch/wp/iewwp010.pdf (accessed on March 4, 2009) Gürerk, Ö., Irlenbusch, B., & Rockenbach, B. (2006). The Competitive Advantage of Sanctioning Institutions. Science, 312, 108-111. Read More