Review 2: Public Goods and Private Communities: The Market Provision of Social Services, by Fred Foldvary (1994)

Douglas W. Allen,
Simon Fraser University,
Journal of Economic Literature,, Vol. XXXIII 868-869 (June 1995)

"The idea that markets fail to provide public goods is about as common as assumptions of risk averse sharecroppers or theories of inflation based on the money supply. Virtually everyone learns as an undergraduate that government provision of national defense, education, and roads is necessary in order to avoid free riding. To suggest otherwise ignores the theoretically obvious. Yet Professor Foldvary sets out to do just this in his colorful and entertaining book.

The book has three major parts. The first eight chapters contain Foldvary's thesis of private provision of public goods, which hinges on the notion that public goods are often territorial, and the rents they generate are tied to the land. As he puts it: "Human beings are land animals, creatures that live in three-dimensional space on the surface of the earth, a fact that is obvious to everyone except an economist writing about public goods" (p. 25) ... and "[t]he private ownership of space permits the collection of the rents generated by the civic services" (p. 111). Because the rents are tied to the land the public good can be "privatized." In this part, Professor Foldvary takes pains to categorize various types of public goods, to define terms like market, natural rights, and clubs, and to argue for various methods of private provision. In his eyes the only role for sovereign provision of a public good is the provision of a constitutional rule of law.

The second part of the book contains five detailed and very readable case studies of private communities. The five include: Walt Disney World; the Village of Arden; the Fort Ellsworth Condominium; the Reston Association; and the private roads in St. Louis. In almost all of these cases there is a discussion of the history and general background of the communities, an analysis of the public goods they provide, and a description of the governance structure and budget process. The final part of the book consists of the last two chapters which provide a public choice perspective on the merits of political versus private provision of public goods (private provision coming out on top), and a call for what Professor Foldvary calls consensual governance.

A strong feature of the book is its ability to point out the obvious: looking at Niagara Falls takes up space; building a dam raises property values; and looking for private provision of public goods is easy. In this regard his work reads like Coase's paper on lighthouses. But the similarity with Coase, and the sense of deja vu, comes close to being a weakness as well. Foldvary anticipates this criticism by arguing that he provides a general theory of private provision, and that his book will go beyond special cases; however, his efforts to do so are not fully satisfactory.

Part of the problem is that elements of his theory are unclear or less than convincing. After developing his notion of territorial goods, he launches in on a discussion of transaction costs and governance structure. This is an important link in the theoretical development, but it shows little sophistication and is difficult to relate to the other chapters. An example of where his theory is not very convincing is his discussion of "nonterritorial" public goods. Here rents are not captured by the land owners and Foldvary seeks an alternative explanation for private provision. He notes that the good may be tied-in with an excludable good, but ultimately argues that benevolent private provision results from "Smithian sympathy". Though this may not be altruism, it is an untestable taste-based argument nonetheless, and takes away from his well argued case for territorial goods.

Untestable arguments crop up throughout the book. For example, "culture", though never defined, is often cited for various pricing practices: "[w]hether congestion fees are charged depends on social custom" (p. 79); "[c]ulture and customs also play a part in what is charged for" (p. 127). In the discussion of Walt Disney World, Foldvary uses the expensive methods of garbage disposal as an example of how private provision can lead to larger amounts of public goods like cleanliness. However, in discussing the Village of Arden we learn that “Arden is known for its unkemptness; ... many residents cite as one of Arden's attractions the lack of pressure to keep up the lawn" (p 139). When a theory starts to be consistent with anything, it usually ceases to be very useful.

One final disappointment is the failure to explain why we have sovereign provision of public goods. The Alchian survival argument is used in favor of the long standing private communities, but it cuts both ways. Why have certain public goods been most provided by the political rather than by the market process? Has political provision not also stood a test of time? Was the U.S. constitution itself not a consensual governance structure? Foldvary attempts to address this concern toward the end of the book, but his public choice explanation is not very convincing. One gets the impression that if Bosnia could be handed over to the Disney corporation, all would be well. A more positive theory would have developed a theory to explain the joint provision of these types of goods.

It would be misleading to end on such a sour note. Despite some weaknesses, the argument of territorial goods has merit, and is worthy of inclusion in a class-room discussion of public goods. In addition, any of the five case studies are suitable for use in class, and are capable of standing alone as refutations of the general market failure argument."