“But who would build the roads?” is probably the most famous question asked of anyone who doubts the state. Behind it lies a serious economic argument about public goods: things that, supposedly, markets cannot provide because people can enjoy them without paying. This guide looks at the argument and at the many ways people have solved the problem without taxes.
In short
- The theory: some goods are hard to charge for, so people will “free-ride” and markets will under-provide them.
- The practice: roads, lighthouses, streets, security, open software and help for the poor have all been provided voluntarily.
- The tools: exclusion, bundling, assurance contracts, reputation, communities and charity.
- The comparison: the question is not whether voluntary provision is perfect, but whether it beats a tax-funded monopoly.
What is a public good?
Economists, following Paul Samuelson (1954), call a good “public” when it has two features:
- Non-excludable: once it exists, it is hard to stop people who did not pay from using it. A fireworks display can be seen by everyone in town.
- Non-rival: one person’s use does not reduce what is left for others. Your watching the fireworks does not stop me from watching them.
The worry is the free-rider problem. If I can enjoy the fireworks whether or not I pay, why should I pay? If everyone thinks this way, nobody pays, and the fireworks never happen, even though everyone would have been willing to chip in. Therefore, the argument goes, the state must provide such goods and fund them with taxes.
Problems with the argument
Libertarian economists point out several weaknesses.
- Few goods are truly public. Roads, schools, healthcare, rubbish collection and even most security are excludable: you can charge for them, and in many places private firms do. They are provided by states for political reasons, not because markets cannot.
- Free riding is everywhere and does not stop markets. You benefit from your neighbors’ well-kept gardens, from other people’s inventions, from Wikipedia. Societies are full of positive spillovers that nobody pays for, and that is fine.
- The state has its own free riders. Lobbyists, subsidized industries and politically connected firms “free-ride” on taxpayers on a much larger scale.
- How do we know how much to produce? Without prices, there is no way to tell how much people actually value a tax-funded good. A state may build a motorway nobody uses or neglect one everyone needs.
- “Under-provided” compared to what? The real comparison is between imperfect voluntary provision and imperfect state provision, with all its waste, politics and lack of choice.
Roads
Most roads in history were not built by central states.
- Turnpike trusts. In 18th- and 19th-century England, more than a thousand local trusts built and maintained roads funded by tolls. They created much of the network that carried the Industrial Revolution.
- Private roads today. Sweden has tens of thousands of kilometres of private roads run by local road associations, whose members, mostly the people who live along them, share the costs. Many receive a public subsidy, but the management is local and voluntary.
- Toll motorways. Many motorways in France, Italy and elsewhere are built and operated by private concession holders and funded by tolls.
- Private streets. In St. Louis, Missouri, private streets owned by residents’ associations have existed since the 19th century. In the 1970s, the architect Oscar Newman found them quieter and safer than comparable public streets nearby.
In a free society, roads could be funded by tolls (now trivial to collect electronically), by property developers who know that land with access is worth more, by shops and businesses that need customers to reach them, and by residents’ associations.
Lighthouses
For decades, economics textbooks used the lighthouse as the perfect public good: a ship cannot be stopped from seeing the light, so nobody would build one privately. Then, in 1974, Ronald Coase (later a Nobel laureate) looked at the actual history in The Lighthouse in Economics. He found that many English lighthouses had been built and operated by private individuals, financed by light dues collected from ships in port. The textbook example turned out to be a textbook mistake. Later research added a caveat: Elodie Bertrand (2006) showed that the private owners needed a royal patent to build a lighthouse, and the dues were collected with the backing of the state. The debate goes on, but the lighthouse is no longer the clean example the textbooks made it.
How voluntary provision works
Exclusion
New technology keeps turning public goods into private ones. Television was once “non-excludable”; then came encryption and subscriptions. Roads were hard to charge for; now electronic tolling is cheap.
Bundling
Many “public” goods are provided as part of a package. A shopping center provides security, lighting, toilets, cleaning and parking for free, paid for out of the rents of its shops. Hotels, theme parks, office parks and planned communities do the same. The economist Fred Foldvary showed in Public Goods and Private Communities (1994) how residential communities fund streets, parks and security out of membership fees.
Assurance contracts
Why pay for a lighthouse or a road if you don’t know whether others will chip in, and if they do, you can use it for free anyway? The answer is an assurance contract, also known as all-or-nothing funding: you pledge money, but you only pay if the full target is reached, so you never lose money on a project that doesn’t happen. Kickstarter and other crowdfunding platforms work this way and have funded hundreds of thousands of projects. The economist Alex Tabarrok went a step further in 1998: in his dominant assurance contract, if the target is missed, the organizer refunds backers plus a bonus. Pledging pays off either way: the project gets built, or you come out ahead.
Reputation and community
People pay for things voluntarily all the time, from tips to donations to open-source software. Linux, Wikipedia and Bitcoin itself are public goods built and maintained by volunteers and companies who benefit from them.
Helping the poor
The most emotional version of the question is: who would help the poor, the sick and the old?
Before the welfare state, people were far from helpless.
- Mutual aid societies. In Britain, friendly societies insured millions of working people against sickness, injury and funeral costs in the 19th and early 20th centuries. In the United States, fraternal societies offered life insurance, “lodge doctors” and even orphanages, as David Beito describes in From Mutual Aid to the Welfare State (2000).
- Czech and Central European tradition. Workers’ associations, Sokol clubs, cooperatives (družstva) and church charities built a dense network of self-help in the 19th century. Many of them were dissolved or nationalized after 1948.
- Charity. People give generously when they can. Private donations still fund hospitals, hospices, food banks and research.
- Family and community. Still the first safety net for most people.
When the state took over welfare, much of this civil society withered: why join a mutual aid society when the state “provides”? Libertarians argue that a freer and richer society would rebuild it, and that voluntary help is more personal, more flexible and less humiliating than bureaucratic benefits.
Hard cases
Libertarians admit that some goods are harder than others.
- National defense is the most discussed. See private law and defense for possible answers.
- Basic research is often said to need public funding, yet much of it has historically been funded by private patrons, foundations and companies.
- Pollution can be handled as a property-rights problem: polluters who harm others’ property are liable. See property rights.
The honest position is that voluntary solutions will be imperfect. So are state solutions. The question is which system learns from its mistakes faster, and which lets you walk away when it fails you.
Where to go next
- The legal side: private law and defense.
- History: stateless societies in history.
- How the state funds itself today: is taxation theft?
Further reading
- Ronald H. Coase: The Lighthouse in Economics (1974).
- Elodie Bertrand: The Coasean analysis of lighthouse financing: myths and realities (2006).
- Fred E. Foldvary: Public Goods and Private Communities (1994).
- David T. Beito: From Mutual Aid to the Welfare State (2000).
- Tyler Cowen (ed.): The Theory of Market Failure (1988). Both sides of the debate.
- David D. Friedman: The Machinery of Freedom (1973), chapters on public goods.