Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't by John Jr. (books to read for 12 year olds txt) 📗

weapons weren’t allowed, as well as calculations of the monetary and social cost of these crimes that never occurred. Keep in mind that the politicians and civil servants drafting these regulations are rarely experts in the areas they oversee. As for concealed handguns, all states in fact discourage permits by charging a mandatory licensing fee that is usually far above the administrative cost of issuing the permits. Far from being subsidized, concealed weapons permits are, in effect, taxed.

There is another similarity between LoJacks and right-to-carry laws. Some states allow residents to carry a gun openly. This certainly benefits the person carrying the gun—not many criminals would attack someone they knew to be armed. But open-carry doesn’t produce the same social benefit as concealed handguns do. Although open-carry discourages crime around the person openly carrying a gun, criminals may simply go after other people without guns, just like installing LoJacks in Porsches would encourage criminals to steal other cars. So open-carry has a private benefit for gun carriers, but it also may increase the rate of attacks on people without weapons.6

The late economist Milton Friedman noted a further complication in subsidizing products or practices that create social benefits: subsidies may not even be necessary because people often have enough individual incentive to do the desired action without any government intervention. Take Friedman’s example—education. Let’s assume by the time a student enters high school, his education has instilled in him positive values such as support for democracy and the avoidance of criminality. Perhaps this indicates that education should be subsidized, since more overall schooling benefits society by strengthening the general commitment to democracy and reducing crime. Yet, education also offers the private, individual benefit of increasing a student’s future job prospects. As Friedman pointed out, we can get the social benefit of education without subsidizing it because students will attend school to obtain this personal benefit.7

The debates over government subsidies are closely linked to the “free-rider problem” in economics. Suppose a person spends time or money on something that incidentally benefits others, but these beneficiaries pay little, if any, of the costs. Such free-riding situations tend to result in a dearth of the beneficial action, since many people will hope to get the benefit for free through others’ actions. This situation often elicits demands for state subsidies to encourage the valuable activity. This applies to the use of crime prevention devices like LoJack as well as actions like charitable giving and volunteerism, which are sometimes effectively subsidized through tax deductions.

There are two questions involved in free-riding problems: Do others benefit from your action? And if so, is it possible to prevent them from getting this benefit? When it’s impossible to exclude others from the benefit, a free-riding problem is likely to develop. For example, if LoJack were actually effective, a free-riding problem could easily appear, since those without LoJack would hope thieves will stay away from their own cars in fear that it might have the device. Enough free-riders might then stop buying LoJack that the social benefit—the overall drop in car thefts—would disappear.8

Another example of free-riding was seen during the early development of radio. Today, virtually everyone takes it for granted that advertising is a sensible way to finance radio broadcasting. Few people realize that free-riding problems initially seemed almost insurmountable in providing radio service. Because no one could figure out how to make listeners pay, radio hosts and entertainers usually had to work for free.9 For over twenty years, broadcasting primarily involved hobbyists and a few public service transmissions by government stations.

Some people doubted there was any way to make listeners pay. In 1922, Herbert Hoover, then Secretary of Commerce, declared: “Nor do I believe there is any practical method of payment from the listeners.” 10 Others assumed that radio transmissions would eventually be funded by paying subscribers, but no one could devise a method for limiting broadcasts to subscribers’ receivers. Consequently, some believed the government would have to provide the service. In 1922, Popular Radio magazine claimed that radio was “essentially a public utility” and discussed using city telephone wires to sell broadcasts to subscribers—in other words, providing radio service over the phone.11

So what happened? Did private businessmen throw up their hands and invite the government to run the industry? Was society denied the benefit of radio because no one could solve the free-riding problem? Of course not. The problem was eventually resolved in 1922 when AT&T discovered it could make money by selling radio advertising airtime. In hindsight, it’s hard to believe that private radio almost died in its infancy because people couldn’t figure out how it could make money. And it’s a good thing that the government decided not to turn radio into a subsidized enterprise, since it is highly unlikely that the state would have distributed payments as efficiently as advertisers do.

With enough at stake, companies find amazingly creative ways to solve free-riding problems. Government subsidies only deaden the incentive to discover these solutions. For example, many analysts used to regard beekeeping and apple farming as a classic free-riding problem.12 Apple blossom nectar provides food for bees, which pollinate the blossoms as they gather the nectar. Economists feared that apple growers were free-riding from neighboring beekeepers, and that this would eventually result in too few apples as well as too little honey. But apple growers and beekeepers devised a number of solutions to this problem. The most obvious method was for apple farmers to set up their own bee-hives. 13 However, as Steven Cheung showed, the more common solution was for apple growers and beekeepers to create markets where they transacted regularly. The Yellow Pages in rural Washington State developed long listings of pollination services available to farmers. Yet, despite the evolution of free market solutions, beekeepers cited the existence of this potential free-riding situation as an excuse to lobby the government to implement a honey price support program. The program began modestly in the early 1980s, but quickly