Infrastructure & public interest
This section/department covers the residual of activities carried out by a number of departments, many of whose activities do not belong in government, or at least in central government:
- Communities & Local Government
- Energy & Climate Change
- Environment, Food & Rural Affairs
- Culture, Media & Sport
- Business, Innovation & Skills (excluding further education, which is covered in the Education section)
- Transport
Internalizing externalities
The first priority in these areas is to move as many of the activities as possible out of central government, and preferably out of government altogether. What remains will be a department that provides the institutional framework to "internalize externalities" in parts of the economy not covered by the other departments. Externalities are values that are not fully taken into account and attributed to the appropriate party by the current market framework. The linked Wikipedia article provides many examples. Internalizing externalities involves the improvement of our institutional framework to more fully attribute the values of these items to the appropriate party.
For instance, the emission of greenhouse gases can be argued to be an externality, because the people who emit the gases are not charged the full cost of the possible consequences of those emissions. Internalizing the greenhouse-gas externality requires the creation of a mechanism that imposes the cost of the possible consequences on those who emit the greenhouse gases, and compensates those who experience the costs of those consequences.
Public goods
One common form of externality with which several of the above departments are involved is known as a "public good". A public good is a good for which it is difficult to charge people enough to provide it, even though the value of the good to people may be significant. That may be, for example, where it is hard to prevent people "free-riding": taking advantage of the good without paying. In this case, it may not be rational for anyone to pay enough to provide the good, even though everyone would benefit from its provision. Lighthouses, roads and national defence are common examples.
Natural monopolies
One type of public good in which it is necessary for government to intervene is a "natural monopoly". This is a good for which it is so economically inefficient to provide competing options that in practice the first-mover tends to establish unchallenged dominance. These occur most often in the utilities, e.g. the networks for electricity, gas, water, and telecommunications.
That does not mean that all parts of the provision of electricity, gas, water and telecoms are natural monopolies needing government intervention. It is important to distinguish between the areas where it is genuinely difficult to have parallel competing options (e.g. the physical networks) and the areas where competing options are feasible (the provision of goods and services over those networks).
Externalities and public goods narrowly defined
Government has an important role to play in internalizing genuine, material externalities, and in providing genuine public goods. But many things are mis-categorized by interventionists as externalities or public goods.
It is not enough, for instance, that a good is very important to our wellbeing. Food and clothing are very important to our wellbeing, but most people would not argue that the government should provide them. Governments should not intervene in the provision of those goods that can be provided and charged appropriately without government intervention, regardless of whether the quantity and cost of the goods conforms with the subjective preferences of any individual or group.
If, for example, the market does not provide as much opera as the Establishment wishes it would, that is not a failure to provide a public good, but a reflection of public demand. There is nothing to stop people putting on an opera and charging people for it. It is easy to prevent free-riding. If the money that can be obtained for putting on an opera is insufficient to cover the costs, this simply demonstrates that opera needs to be provided more cheaply or not at all, not a failure in the market. It is no different to the failure of the market to provide as many gold pigs as people might like were money no object.
The proliferation of this mis-categorization, and intervention where non-intervention would be more efficient, is the reason why these are the areas in which we have identified some of the largest cuts to be made in our proposed budget.
Provide the institutional framework, not the goods themselves
Even for genuine public goods, it does not necessarily follow that government should provide them. It may be more efficient for government to provide the institutional framework that ensures that people and businesses provide them.
Simplicity and generality - don't pick winners
Where the government intervenes to internalize externalities or ensure provision of public goods, it should avoid picking winners, and over-complicating mechanisms. Politicians and civil servants never have sufficient expertise and accurate information to choose solutions, as opposed to providing the mechanisms through which specialists are enabled to choose solutions. Where they seek external, expert information, those who they speak to are either potential beneficiaries and therefore likely to shade their advice to favour the outcomes that would benefit themselves, or not potential beneficiaries (e.g. consultants), in which case they usually do not have the hands-on experience required to provide good advice. Genuinely expert consultants will know that every circumstance is different, but government will demand some form of (invalid) generalization that allows it to pick its winners. And even if governments could find the ideal adviser on the circumstances as they stand today, tomorrow the circumstances will be different, and they will have to start the process again, or live with out-of-date solutions.
Stable and rational frameworks for entrepreneural discovery
Governments must provide stable and rational institutional frameworks within which entrepreneurs are empowered to make their own judgments about how best to respond to expectations and incentives. Governments can then rely on the diversity of the market to discover which entrepreneurial solutions most efficiently respond to the incentives and the circumstances of the time. The constantly iterating market process will continuously refine itself to take advantage of the lessons learned and adapt itself to changing circumstances. Failures as well as successes are an inherent part of this process (sometimes referred to as "creative destruction"), and are a sign of the market working, not failing. Inhibiting this process (e.g. through targeted subsidies for less competitive solutions) is not correcting "market failure", but increasing it. It is the mono-culture of public provision that prevents us from discovering what works best, not the harsh but diverse environment of competitive markets.
Our policies in this area aim to scrap intervention in false externalities and public goods, and simplify and rationalize interventions in genuine externalities and public goods.
