In economics, a public good (also referred to as a social good or collective good) is a good that is both non-excludable and non-rivalrous. Use by one person neither prevents access by other people, nor does it reduce availability to others.
Public goods include knowledge, official statistics, national security, common languages, law enforcement, broadcast radio, flood control systems, aids to navigation, and street lighting.
The critical property is that a public good is non-excludable. That is, if you don’t pay for it, you still benefit from it.
In a situation where you have a non-excludable good like national defense, you will normally see underinvestment in the thing relative to the benefit it provides to everyone in aggregate.
That’s because people make decisions based on the benefit to them. If they reduce spending on a non-excludable good, they get 100% of the benefit of the money they now aren’t spending, but their access to the public good is only reduced proportionally to the amount of the good they were paying for. Since it’s that price information that leads to decisions, this produces market failure, inefficient allocation of resources.
Let’s say that I don’t want to pay taxes to pay for the US military, so I stop. I get all of my tax money back. But, since almost everyone else in the US is still paying for the military – maybe there is one-three-hundred-millionth reduction, as there are about 300 million people in the country – I see virtually no reduction in the military service being provided.
The problem is that if everyone else makes the same assessment – where on an individual level, it is to their benefit to not pay the tax, so they stop – then there is no military, and suddenly everyone is impacted.
Normally, the way to solve that us to make the decision-making for such non-excludable goods done in aggregate. So we all decide how much to spend collectively – the government makes one decision for all. Hence, a tax or commitment to pay a certain amount or such.
The phenomenon is the same among countries. Luxembourg is only a small portion of NATO’s total spending. If Luxembourg has no military, then it will save all the money it spends, and it could hope, as long as everyone else still has a military and their interests are more-or-less aligned, that its security situation won’t change much. But if everyone follows the same logic, then there is underinvestment.
The misincentive becomes stronger the smaller the proportion of the non-excludable good one is paying for.
If one country is paying 100% of the costs, then there is no misincentive.
If one country is paying 50% of the costs, then if they stop spending, they get 100% of their money back, but still get 50% of the military benefit.
If one country is paying 1% of the costs, then if they stop spending, they get 100% of their money back, but still get 99% of the military benefits.
The US pays a large share of the percentage of military spending in NATO, so it has a (relatively) small misincentive to underspend. The smaller the country in terms of aggregate spending, the greater the misincentive. Because the military spending decisions are made at a state level in the EU, and at a central level in the US, the misincentive to underspend at the decision-making level is stronger in Europe. If the US made military spending decisions at a state level, it would see similarly-greater misincentives.
Ideally, you would want to have an aggregate decision made for the aggregate to avoid misincentives. The “2% of GDP spending floor” commitment in NATO is basically that – making a spending decision at the aggregate level.
It’s rather like the tragedy of the commons, except that in that scenario, the goods are rivalrous – the pasture can be used up by overgrazing – and in this case, it cannot. But in both cases, the good is non-excludable, and because of that, there will tend to be underinvestment in the good.
Unfortunately, Europe’s leaders are weak and distracted by their problems at home. Instead of standing up they are more likely to bury their heads deeper in the sand.
I kind of feel like, of all publications, The Economist could be expected to give a better analysis of why this is occurring than the above text.
State violence is considered good by economists because it’s how capitalism is violently imposed and enforced. But in reality it’s a root cause of ongoing planetary destruction.
Part of it is also just structural.
The US can tax people in the US. So it’s easy for the federal authorities to have everyone chip in.
There is no analog in Europe in 2024.
The EU does not presently have the authority to tax. So it’s not easy to do the same.
National security is an example of a public good:
https://en.wikipedia.org/wiki/Public_good_(economics)
The critical property is that a public good is non-excludable. That is, if you don’t pay for it, you still benefit from it.
In a situation where you have a non-excludable good like national defense, you will normally see underinvestment in the thing relative to the benefit it provides to everyone in aggregate.
That’s because people make decisions based on the benefit to them. If they reduce spending on a non-excludable good, they get 100% of the benefit of the money they now aren’t spending, but their access to the public good is only reduced proportionally to the amount of the good they were paying for. Since it’s that price information that leads to decisions, this produces market failure, inefficient allocation of resources.
Let’s say that I don’t want to pay taxes to pay for the US military, so I stop. I get all of my tax money back. But, since almost everyone else in the US is still paying for the military – maybe there is one-three-hundred-millionth reduction, as there are about 300 million people in the country – I see virtually no reduction in the military service being provided.
The problem is that if everyone else makes the same assessment – where on an individual level, it is to their benefit to not pay the tax, so they stop – then there is no military, and suddenly everyone is impacted.
Normally, the way to solve that us to make the decision-making for such non-excludable goods done in aggregate. So we all decide how much to spend collectively – the government makes one decision for all. Hence, a tax or commitment to pay a certain amount or such.
The phenomenon is the same among countries. Luxembourg is only a small portion of NATO’s total spending. If Luxembourg has no military, then it will save all the money it spends, and it could hope, as long as everyone else still has a military and their interests are more-or-less aligned, that its security situation won’t change much. But if everyone follows the same logic, then there is underinvestment.
The misincentive becomes stronger the smaller the proportion of the non-excludable good one is paying for.
If one country is paying 100% of the costs, then there is no misincentive.
If one country is paying 50% of the costs, then if they stop spending, they get 100% of their money back, but still get 50% of the military benefit.
If one country is paying 1% of the costs, then if they stop spending, they get 100% of their money back, but still get 99% of the military benefits.
The US pays a large share of the percentage of military spending in NATO, so it has a (relatively) small misincentive to underspend. The smaller the country in terms of aggregate spending, the greater the misincentive. Because the military spending decisions are made at a state level in the EU, and at a central level in the US, the misincentive to underspend at the decision-making level is stronger in Europe. If the US made military spending decisions at a state level, it would see similarly-greater misincentives.
Ideally, you would want to have an aggregate decision made for the aggregate to avoid misincentives. The “2% of GDP spending floor” commitment in NATO is basically that – making a spending decision at the aggregate level.
It’s rather like the tragedy of the commons, except that in that scenario, the goods are rivalrous – the pasture can be used up by overgrazing – and in this case, it cannot. But in both cases, the good is non-excludable, and because of that, there will tend to be underinvestment in the good.
I kind of feel like, of all publications, The Economist could be expected to give a better analysis of why this is occurring than the above text.
State violence is considered good by economists because it’s how capitalism is violently imposed and enforced. But in reality it’s a root cause of ongoing planetary destruction.