Notes on Public Goods and Free Market Anarchism:
Public Good - Any good that is non-rivalrous and non-excludable. Such goods, when produced by private entities suffer the "free rider problem."
Free Rider Problem - When people consume a product but do not pay for it.
Example of a Public Good - National defense. If I put an anti-missile system in my backyard, it will not only protect my own home, but the homes of my neighbors (since a missile that would destroy my home would also destroy all the houses in my neighborhood).
Government Solution to Free Rider Problem & Public Goods - The government pays for public goods and taxes the public for it. It justifies the taxes by claiming that free riders need to pay their fair share.
Problems with the Government Solution - The government does not know how much of the public good is optimal. The government could overproduce or underproduce the public good. Moreover, the government would have to set a different tax rate for each person in order to truly be fair, so that the amount tax corresponds to how much such a person would be willing to pay for defense in a free market. This is an impossible task for government to undertake.
Free Market Solution - Assurance contracts. An assurance contract solves the problems with the government solution by producing an amount decided by the free market and by having everyone pay an amount which they believe is adequate for their own defense.
Political Atheists Blog
That was good. This may be of use too.
krazy kaju:Free Market Solution - Assurance contracts.
Are you familiar with Tabarrok's work on Dominant Assurance Contracts? (PDF)
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David Z
"The issue is always the same, the government or the market. There is no third solution."