In this chapter, we want to continue with the same Dinky example we used last chapter. Five families. All living at the end of an unpaved cul-de-sac. It still costs $25,000 to hire a contractor to pave the road. Only this time, we want to use some different "happiness values" for the five families. After all, nobody ever sees other people's valuations of public goods. So the following happiness values are in principle just as reasonable as any other.

Given these values, do we want the cul-de-sac paved? In this example, the residents of Dinky get only $20,000 of happiness ( = $7,000+$6,000+$5,500+$1,000+$500) from having the road to their homes paved. Since paving this road would remove resources worth $25,000 elsewhere in the economy, we don't want Dinky paved.

Here's the good news: Under a PRIVATE SECTOR arrangement, this road would never be paved. Figure it out. Even if every one of the residents paid the entire dollar value of the happiness that the paved road would provide for them, they still wouldn't have enough money to pay the contractor. To get enough money to pay the contractor, these families would have to contribute more money than the project was worth to them. Since this would never happen under a voluntary contribution system, the road would not be paved. This illustrates a general principle about the private sector provision of public goods (and goods characterized by positive externalities): UNDER PRIVATE SECTOR ALLOCATIONS, INDIVIDUALS WILL NEVER ARRANGE TO HAVE PUBLIC GOODS PRODUCED WHICH LOWER SOCIETY'S HAPPINESS.

But now consider what happens under MAJORITY VOTING. Once again, we reproduce the individual households' willingness to pay values in the "Benefits" row. The "Costs" row represents each household's tax burden. The "Vote" row shows how each household would vote if the road-paving proposition appeared on the Dinky general election ballot.

In this case the proposition passes by a vote of 3 to 2. The road is paved. And that is a shame. In approving this proposition, the majority of voters have initiated a resource transfer that will take resources that would have produced $25,000 of happiness elsewhere in the economy, and directed them to an activity that generates only $20,000 of happiness. MAJORITY VOTING HAS JUST LOWERED SOCIETY'S HAPPINESS BY $5,000. How could this happen? How could the majority do this to society? What went wrong?

The solution to this puzzle has to do with NEGATIVE EXTERNALITIES. Only this time, it's not a private sector externality, but a public sector "externality." Recall what a negative externality is. It is a cost experienced by a third party to a resource transfer. When a factory belches black clouds of breath-stifling smoke into the atmosphere, it imposes costs on consumers who live near the factory. But consider this: When a voter votes for a proposition that makes other citizens worse off, he also imposes costs on those citizens. Economically speaking, this voter has just done to other citizens what the factory has done to its neighbors.

We can see this more clearly in the table below. The third row in the table reports the gains or losses ("Profits") that each voter experiences if the road-paving proposition passes. Note that the three voters who vote in favor of the proposition receive relatively small gains as a result of the resource transfer ($2,000+$1,000+$500 = $3,500). In contrast, the two voters who vote against the proposition sustain relatively large losses ($4,000+$4,500 = $8,500). Thus, majority voting has allowed the first three households to vote $3,500 of positive "profits" for themselves at the expense of $8,500 in negative "profits" for the other households, generating a net decrease in society's happiness of $5,000. Because the Andersons, Bakers, and Custers do not internalize the costs they impose on the Demeters and Ewings, they make a socially incorrect resource transfer.

Perhaps we're being a little too harsh on our voters. Maybe voters are more broadminded than we give them credit for. Here's a way to check close this story comes to reality. Think back to the last Presidential election. Did you vote for the Republican or the Democratic candidate for President? When you voted, did you stop and consider how your friends and loved ones felt about your choice? How your co-workers and neighbors felt about it? Probably you knew somebody whose political views were exactly the opposite of yours. Did that make a difference in your presidential vote? And that's just the feelings of people you know. How about the feelings of people you don't know? Did you stop and think of what you were doing to them? Every four years millions of Americans are made miserable for at least "four more years." Yet most Americans will not let that affect their decision. They will simply vote for the candidate that they want. In so doing, they are the political equivalent of belching smokestacks.

In fact, there is an interesting parallel between the imperfections of private sector and public sector provision of public goods. Private sector provision of public goods is imperfect because there are external benefits which are difficult for profit-seeking individuals to capture. Public sector provision of public goods is imperfect because there are external costs which are difficult for profit-seeking individuals to avoid. Both kinds of imperfections can lead to resource allocations which do not maximize society's happiness.

Think of public goods provision as a bus ride. When the private sector operates the bus, an entrepreneur is in control of the steering wheel. He decides where to take the bus. Of course, the passengers don't have to go along for the ride. They are free to get on or off. The problem for the private sector lies in the collection of the fares. The nature of public goods is such that some--perhaps many--passengers can ride the bus without having to pay the fare. This results in "free riders." If there are too many free riders, the entrepreneur may not collect enough money to compensate him for operating the bus. So the bus line may go out of business--even though it's increasing society's happiness.

In contrast, when the public sector operates the bus, the majority is in charge. They control the steering wheel and take the bus wherever they want it to go. The problem for the public sector lies in the passengers who have to ride the bus. They are not free to get on or off. Once a majority decides on a destination, everybody is forced to ride the bus and pay the fare. The nature of government is such that some--perhaps many--passengers will be forced to pay for the ride even if they don't want to go where the bus is going. This results in "forced riders." If the forced riders are made sufficiently worse off by where the majority want to go, society's happiness will be decreased. But because government makes everyone pay, the bus line stays in business. It keeps on going even though it lowers the happiness of its passengers.

Of course, this does not imply that public provision of public goods will lower society's happiness. Indeed, the previous chapter provided an illustration of how government intervention in the public goods market could increase society's happiness. It's just that--as in the case of externalities and public sector regulation of monopoly--there is no guarantee that government intervention will improve on the private sector allocation of resources. It could make things worse.

In summary, there is nothing magical about democratic majorities. When it comes to resource transfers, the problem is always one of information. Majority voting does not produce the detailed information that is missing in private markets. It tells us how many people gain or lose from a particular resource transfer. It doesn't tell us how much people gain or lose from resource transfers. It is the latter information that we need to know in order to make resource transfers which maximize society's happiness. And because this information is lacking in political markets, resources can easily be misallocated in the public sector--just as they are misallocated in the private sector--when market imperfections are present.