In a comment by Jeff Mayowitz on one of my most widely read posts on Recycling, he stated that:
“ I’d argue that businesses cannot grow and prosper without some government subsidies. Government subsidies have helped build our infrastructure, helped maintain our roads, bridges, tunnels, seaports…[etc.]…. and government subsidies are to thank.”
Later in his argument he states that,
“I agree that recycling is far from perfect. But government subsidies have helped improve upon it. In my opinion, it is better to subsidize the recycling industry than to continue to subsidize the oil industry that continues to see record profit. “
I feel it is important to bring up these two points in his comment because subsidies, in general, and its relation to environmental policy are two arguments that I feel are widely misunderstood in society. First, I disagree with that businesses CANNOT grow and prosper without some government subsidies, because in most cases they can and do. In order to fully respond however, I am going to explain why and when subsidies are warranted in a three-part series.
The first part of my response is that there are goods that cannot function successfully without government assistance. These are called public goods. Let me explain.
Public goods are described as goods that are nonexcludable and nonrivalrous. Anything that falls under a pure public good is best funded through the government.
Nonexcludable means that you cannot exclude someone from using that good. Fireworks shows are a great example. If someone charged customers to put on a firework show in your town, some people might pay to sit on the lawn in the designated space, but it would be difficult to charge the consumers who watch from their own backyards or on the street. There would be a lot of free-riding (benefiting from the good, fireworks, without paying for the good), so it is unlikely that the person putting on the firework show would even do so in the first place. He would probably lose more money than he could make, because he cannot exclude anyone from watching the fireworks.
The nonrivalrous part of a public good means that each additional individual using the good does not make the good cost more. To make that clearer, a rivalrous good is one In which providing a greater amount of a good requires either more of that good to be produced or less available for others. A nonrivalrous good has neither of these. Watching a fireworks show does not make the cost increase for the other viewers nor does it make the amount of fireworks run out faster. If a good has these two requirements, nonexcludability and non-rivalry, than to provide an efficient level of the good the government must do it and fund it through taxes
A more popular example of a public good is national defense. If 100 people in a town paid for national defense if an outside intruder was to do harm on the region surrounding the town, then if an intruder came in everyone in the town would likely benefit from the defense being there, even those that did not pay for defense (nonexcludability). Further, national defense is intended to protect a region (or country) and it does not cost more based upon the people living in that land (nonrivalrous). If you assume that national defense is protecting our country, its land, buildings, resources etc. than each additional person living here benefits if that land is protected and does not add to the cost of defense. Public local protection, however, is rivalrous in that a larger population requires more police, firemen etc. and it being a “public” good becomes a bit weary. If national defense were privatized and funded through individuals there would be the issue of a free-rider problem and also, there could be competing “U.S. armies”. There there would be the issue of which army is supreme in dealing with foreign conflicts, which could perhaps create even more conflict. Further, if I saw my neighbor not paying for national defense while I did, but he still benefited from me paying this creates an incentive for me not to pay in the future and just “free-ride” off of others that willingly pay. If this idea persists, eventually no one will pay for national defense which would create larger problems for security.
Another great example of a public good is a lighthouse. A popular, but tedious, economic paper on lighthouses as a public good was written by the late Ronald Coase.
Private goods, on the other hand, can function without government assistance. Environmental companies can get seed money from venture capitalists, hire lawyers to comply with EPA restrictions and create a product that people are willing to buy (like solar panels on houses.) Now, these companies don’t have to exist, but if there is demand for the product and low costs the incentive of profit will drive entrepreneurs to enter this new business. There is excludability, such that one can pay for these goods and receive it or one can choose not to and not receive it. There is rivalry in that if someone wants a solar panel it costs more to produce and there are finite resources.
In terms of recycling, it is not a public good. It is excludable in that if I don’t pay for my containers to be compounded and the materials to be reused I don’t recycle. (Assuming we are not forced via taxes like in most cities and states today.) It is rivalrous in that it does cost more if I chose to recycle and it costs more per each person who wants to recycle.
There are numerous other private goods that one can think of: clothing, video games, cable television, restaurants, books, recycling, highways, train services etc. Companies producing these goods CAN and DO prosper without government assistance. Only goods that are “public goods” are more efficiently produced, or would even be produced at all, when public funds are used. These goods are usually funded through taxes and not subsidies, however.