Review 4: Public Goods and Private Communities: The Market Provision of Social Services, by Fred Foldvary (1994)

Mark Pennington,
Journal of the Institute of Economic Affairs, Volume 16, No. 2 (Spring 1996)

"Previous refutations of market failure thesis have possessed a rather ad hoc quality. Whether it be Coase's 'Lighthouse in Economics' or the more recent efforts of the 'free market environmentalists,' studies have shown how 'particular goods' can be and are provided by the market, but they do not present a comprehensive theory of why most, if not all, such goods are better supplied by voluntary means. Fred Foldvary's book is the first to provide such a framework and succeeds in its stated task of turning the market failure thesis completely on its head.

The essence of the Samuelsonian public goods dilemma is the difficulty of getting individuals to reveal their demand for goods, the benefits of which will be available irrespective of payment. Foldvary dispatches this argument by introducing a simple, but often neglected, concept in economics - space. ... public goods ... exist within a distinct spatial area; they are 'territorial goods' and are thus inherently excludable. Because the economic value of space is affected by the goods available within that area, individuals have no choice but to reveal their demand as the owner of space collects the rent. So entrepreneurs will, in the absence of regulation, create 'communities' and adapt to provide public good characteristics, maximizing positive externalities and minimizing negative externalities, on a range of territorial scales.

Most so-called public goods - streets, parks, dams, scenic views and wildlife conservation - exist within a distinct spatial area; they are 'territorial goods' and are thus inherently excludable. Because the economic value of space is affected by the goods available within that area, individuals have no choice but to reveal their demand as the owner of space collects the rent. So entrepreneurs will, in the absence of regulation, create 'communities' and adapt to provide public good characteristics, maximising positive externalities and minimising negative externalities, on a range of territorial scales. Examples include private condominium developments, shopping centres, industrial parks and the interior of hotels.

These ideas represent a rigorous reformulation of Spencer Heath MacCullum's work in an early Institute for Humane Studies publication, 'The Art of Community' (1970). MacCullum advanced the idea of the private 'proprietary community' based on his experience of contemporary US real estate developments which included private roads and open space provision, as the best solution to the problems of urban governance.

Following on from MaCullum, a great strength of Foldvary's work is the combination of sound theory with a wealth of empirical material in the form of case studies. There are detailed and well-researched chapters documenting the private provision of territorial public goods, including Walt Disney World, the communities of Arden, Reston and Fort Ellsworth, and the private places of St. Louis.

If this were not enough to bury the market failure merchants, a sophisticated public choice analysis contrasts the 'government failure' of imposed governance by the state, with the harmony of 'consensual governance' under the market. With all the land and communities privately owned, entrepreneurs will (as happens in the case studies) 'market' constitutional provisions limiting arbitrary interventions and the wanton rent-seeking and bureaucratic invasiveness found under statist methods of provision.

The most pleasing element of Foldvary's work is the wonderful streak of Utopianism which runs throughout. As Hayek noted some 30 years ago, advocates of the liberal order are often negative and defensive in their style. Here is a positive vision of how the future could be, of which all liberals can be proud."