What should be the core functions of government?

Thursday, 23 March 2017 00:10 -     - {{hitsCtrl.values.hits}}

Two people independently asked me the above question. One was close to the JVP leadership. It is a good question that deserves a proper answer. The rules set out below are likely to be helpful in structuring a political conversation to identify the core functions of government and focus the limited resources of government on them.Untitled-2

First, the government is responsible for public goods. Not just whatever one feels like labeling as public goods, but those that meet the criteria of non-rivalry and non-excludability. 

If my consumption of a good or service does not affect your ability to consume it, it is non-rivalrous. The classic example is national defense, which every government provides. Another example favored by textbook writers is the service provided by a lighthouse. My use of the information communicated by the lighthouse does not detract from yours. 

The second condition that must be satisfied is that of non-excludability. It should be possible to exclude a user from consuming the good or service, without a great deal of trouble and expense. The lighthouse again. It is difficult to prevent a ship from seeing the light. 

Very few goods and services would qualify as public goods. The market will not produce public goods. If they are needed, they would have to be produced using taxes.

Second, the government has a legitimate role in producing goods and services with significant positive externalities. Polio vaccination is a good example. My consumption of the vaccination is rivalrous to your consumption. It is also excludable. It is easy to supply vaccinations through the market. But the benefits to society as a whole are enormous when most people are vaccinated. It justifies government action. But there is an additional reason. Overcoming the opposition of the last few “anti-vaxxers” may require coercive powers of the government.

Third, the government has a role to play when significant negative externalities are involved. Pollution is an example. 

Positive and negative externalities may be interpreted broadly or narrowly. Here, the capacity of government has to be factored in. If the government machinery works well, like in Scandinavia or in Singapore, one could afford to have an expansive definition of significance. But when it’s a government like ours, which lacks capacity despite being 1.4 million strong, narrowly defining a significant externality would be wise.

Finally, there is a possibility of a range of roles. Just because a significant externality exists, government should not take on all aspects of supply. How much it should take on should be decided by the capacity of the government and the competing demands for its limited resources.

For example, expressways yield benefits beyond those who directly use them. They are not public goods (being rivalrous and excludable in nature) but exhibit significant positive externalities. This does not mean that the government should build and operate expressways. Users can be charged tolls, even if the revenues are not adequate to cover all costs. Because of the positive external benefits, the government can commission the construction of the expressway and provide viability gap financing. It can provide cleared land, using powers unique to the state. But it need not necessarily operate the expressway.

People are used to government-operated postal monopolies. In country after country, they are losing money and failing to provide services of adequate quality. Even after people stop writing letters and all bills are delivered electronically, there would still be a need for package delivery (until 3-D printing becomes the norm!). The senders and the receivers would directly benefit, but there are external benefits such as less demand for expensive real estate for bricks-and-mortar retail facilities. 

Quality and price are best addressed through competition. But like in any network industry, competing providers will require interconnection. New entrants will face major barriers unless fair interconnection is enforced to allow packages from one network to be carried by another, or at least delivered to the same mailboxes. This means regulation as in telecommunications, but lighter. Attention may also have to be paid to ensuring service in high-cost areas, if competition fails to do so.

Ideally, the government’s role would be limited to that of regulator, with all competing providers being private. But given a pre-existing organisation and work force, it is likely that a legacy provider will be present. Unless its work culture is changed, it will be unable to compete with lean competitors and continue to be a burden on the taxpayer. The only way to avoid this would be through a public-private partnership, whereby a private entity would be empowered to introduce a new work culture. Gradually, government ownership may be phased out, leaving only the regulatory function. 

As illustrated above, rules may be used as the basis for what is essentially a political conversation about the priority tasks of government. Different political conversations in different countries will yield answers appropriate for the specific circumstances.

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