2017628 IsNationalDefenseaPublicGood?

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2017628 IsNationalDefenseaPublicGood?
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IsNationalDefenseaPublicGood
October29,2002

ThisexcerptispartofachapterofatextIamwritingonmarketfailure.

Isnationaldefenseapurepublicgood?Wecandividethisquestionintothreeparts.(1)Isnationaldefenseagood?
(2)Doesithavethecharacteristicofjointness?(3)And,doesithavethecharacteristicofnonexclusion.We
considereachinturn.InordertosavespacewedenotenationaldefenseasND.

IsNationalDefenseaGood?

Theveryideaofnationaldefenseshouldstopusfromansweringthisquestiontooquickly.Apurepublicgoodmust
yieldbenefitstoeveryone.Noteveryoneinanation,buteveryoneingeneralintheworld.Obviouslyaneffective
NDbyonenationdoesnotbenefitthepeoplewholiveinanothernationandwhofeelthreatenedbythefirstnation's
ND.Thus,whenpeoplesaythatNDhasthecharacteristicofjointness,theymeanthatithasthischaracteristicfor
thepeoplewholiveinanationtowhichtheNDissupplied.Wemightsaythattheyassumethatisa"purenational
publicgood."Wecoulddefinethisasagoodforthecitizensofagivennation.

http://www.constitution.org/pd/gunning/issues/econ/topics/ndpubgd.htm 2/5
2017628 IsNationalDefenseaPublicGood?
Butthisdoesnottotallyremovetheambiguity.IfyouwereanordinaryFrenchcitizenin1944,yourcountrywould
havebeenoccupiedandundertheruleofNaziGermany.YouprobablywouldnothavebenefittedfromGermany's
supplyofNDagainsttheAllies.OrifyouwereacitizenofGranadain1983orHaitiin1994,youwouldprobably
nothavebenefittedfromyournation'sdefenseagainstU.S.troops.IfyouareacitizenofNorthKoreatoday,it
seemsdoubtfulthatyoubenefitfromyournation'sND.

Theessentialpointisthatsomeresidentsofanationmayprefertoliveundertheruleoftheverymilitaryforceor
politicalregimethattheyexpecttoreplacetheonethatiscurrentlyprovidingND.Ifthisistrue,NDwillnotevenbe
agoodforthosepeople.Itmaybeabad.TheclaimthatNDisapurenationalpublicgoodassumesthatallthe
citizensofnationregarddefenseagainstaparticularenemyasabenefit.(1)

TheJointnessCharacteristic

LetusnowaskwhetherNDhasthecharacteristicofjointness.Jointnessmeansthatadditionalconsumerscanbe
addedwithoutincreasingthecostofproduction.Themarginalcostofaddingaconsumertoanygivenquantityis
zero.If100,000peoplearenowenjoyingND,thecostofaddingonemoremustbezero.

Itiseasytoconfusealowmarginalcostwithazeromarginalcost.Supposethatthereisaconstantmarginalcostof
$10.Underthiscircumstance,if100,000consumersareconsumingthegood,thecostofsupplyingthemwillbe
$1,000,000.Toaddonemoreconsumerisonly$10.Thisseemsverysmallcomparedwiththe$1,000,000already
paid.However,itisnotzero.Infact,itisexactlythesameastheaveragecostofsupplyingtheother100,000
consumers.Forjointnesstoexistthemarginalcostofaddingaconsumermustbezero.

ForNDtohavethecharacteristicofjointness,atleastoneofthetwofollowingconditionswouldhavetobepresent.
First,itwouldhavetobepossibletoaddconsumerstoagivengeographicallocationatzerocostwithout
diminishingthelevelofdefenseofferedtootherswhoarealreadythere.Inotherwords,therewouldhavetobezero
congestioncosts.Second,itwouldhavetobepossibletoexpanddefensetocoveradditionalareasinwhich
additionalpeopleliveatnoadditionalcost.Thesecondconditiondoesnotseemtoberealistic.Itseemsevidentthat
conventionalNDcannotprotectanadditionalgeographicalareawithoutadditionalcost.Thisfactisevidentin
countrieslikeIndonesiaandThePhillippines,whichconsistofnumerousislands.IntheUnitedStates,thedefense
burdenincreasedsubstantiallywhenHawaiiandAlaskawereaddedasstates.However,thefirstconditiondoes
seemtobepresent,atleastwithinlimits.Foragivengeographicalarea,additionalpeoplecanbeadded,within
limits,withoutincreasingthecostofdefendingthetotalpopulationbyconventionalmeans.However,beyondsome
point,asmoreandmorepeopleareaddedtoagivenarea,congestionoccurs.EvenifthecostofproducingNDstays
thesame,whenweaccountforallofthecostsofaddingpeople,wemustconcludethatthemarginalcostisnotzero.

TheNonExclusionCharacteristic

DoesNDhavethecharacteristicofnonexclusion?Theanswerseemstobeaflat"no."SinceNDissuppliedtoa
geographicalarea,itisasimplemattertobarsomeonefromenteringthatareaandpartakinginthebenefitsofND.
Thecostsofexclusionarenotzero.Nationalborderswouldhavetobepoliced,identitycardsissued,visitors
screenedandmonitored,andsoon.However,exclusionseemspossibleatareasonablemoneycost.

SupposethatsomeonerefusedtopayhershareofthetaxburdenforND.Thenshecouldbeexiled.Herpassport
couldbetakenawayandshecouldbeforcedtoleavethecountry.

Technically,then,exclusionispossibleandcanbeachievedatrelativelylowcost.Onecomplicatingfactoristhat
thegovernmentmaycontainaconstitutionthatpreventstheexileofacitizenwhorefusestopayapriceforND
services.Forconstitutionalreasons,exclusionmaybeimpossible.Nonexclusioninthiscaseinnotduetothe
technicalnatureofthegoodbuttothestructureofthegovernment.

NationalDefenseasaNaturalMonopoly

IfNDisnotapublicgood,istheresomeotherreasonformarketfailure?Theanswerseemstobeyes.NDseemsto
beanaturalmonopoly.Toseewhy,letustrytoimagineacountryinwhichNDissuppliedthroughthemarket
economy.WeassumethatthesuppliersofNDallhavenationalloyaltyandwouldneverusetheirweaponsagainst
othercitizens.Thus,thereisnochanceofcivilwar.Ifweassumeotherwise,marketsupplywouldbeimpossible.

WemightassumeatfirstthatNDsupplyingfirmswouldcompeteinthemarketforcustomers,notunlikemovie
theatersnowcompete.Thereisjointness,soeachfirmwouldwanttogainasmanyconsumersaspossible.Inorder
toenforceexclusion,eachfirmwouldhavetochooseaparticularpartofanationinwhichtoofferitsservices.Thus,
consumersmighthaveachoicebetweenlivingintheNortheastandbuyingfromtheNENDcompanyorlivinginthe
southwestandbuyingfromtheSWNDcompany.NENDmaychargeahigherpricebutofferahigherquantitywhile
SWNDchargesalowerpricebutsuppliesalowquantity.IfthecostofsupplyingagivenquantityofNDwashigher
inonepartofthecountrythaninanotherpart,wemightimaginethatthefeethatconsumerswouldhavetopay
wouldbelowerforagivenqualityinthepartwherethecostislower.Ifaconsumerwasdissatisfiedwiththehigh
priceofNDinhisjurisdiction,hecouldmovetoalowerpricedjurisdiction.Thusthenationwouldbedividedinto
nationaldefensezones.

Nowitisevidentthatforthissystemtowork,thegovernmentwouldhavetoagreetoalloweachNDfirmtoexclude
anyresidentfromthenationaldefensezoneswhorefusestopayitsNDfee.Otherwiseapersonwhorefusedtobuy
nationaldefenseservicesatallcouldnotbeexcluded.Wemightsupposethatapersonwhochoosesnottopayan
NDfeeatallwouldeitherbeexpelledfromthecountryorbesenttoaplaceinthecountrythatwasnotdefended
andthusvulnerabletoattack.

Wehavenotedthatthereappearstobearelativelyhighmeasureofjointnessindemand.Thismeansthatadditional
consumerscanbeaddedtoagivenareaatzeromarginalcost(oratleastatalowermarginalcostthantheconsumer
beforehim)..SupposethatyoucurrentlylivedintheNortheastandthatyoupaidthesamepriceforNDservicesas
someonelikeyouwholivesintheSouthwest.TheSouthwestcompanycouldaddyouasacustomeratazeroor
relativelylowcost.Itcouldaffordtoreduceitspricetoyoubelowwhatyouwerepayingand,atthesametime,
http://www.constitution.org/pd/gunning/issues/econ/topics/ndpubgd.htm 3/5
2017628 IsNationalDefenseaPublicGood?
relativelylowcost.Itcouldaffordtoreduceitspricetoyoubelowwhatyouwerepayingand,atthesametime,
reduceitspricetoitsexistingconsumers.Thus,itwouldhaveanincentivetoundercutthepricetoyouofferedby
theNortheastcompany.Ofcourse,itwouldhavethesameincentivetoreducepricetoalltheNortheastcompany's
customers.Inpracticalterms,itwouldtrytoattractcitizenstoitsnationaldefensedistrict.Wemightexpectunder
thesecircumstancesthatcompaniesfromdifferentdistrictswouldcompetebyofferingdiscountstonewcomersfrom
otherdistricts.

Thesituationwearedescribingisverymuchlikethatofthetheoryofcompetingpublicutilitycompaniesthe
naturalmonopoly.Inthepublicutilitytheory,autilitycompanycanincreaseitsscaleandreducelongrunaverage
costs.Iftwofirmsofequalsizearemakingnormalprofit,onecanincreaseitssizeandreduceitscosts.Thus,itcan
reducepriceandmakehigherprofitbecauseitwillbeabletoattractcustomersawayfromtheotherfirm.Theonly
feasiblelongrunoutcomeisoneinwhichasinglefirmsuppliesalloftheconsumers.TheNDindustrywehavein
mindissimilar,exceptthattherearecongestioncostsbeyondsomepoint.Toseethesimilarity,assumeatfirstthat
therearenocongestioncosts.ImaginetwoadjacentNDregionseachofequalsizeandpopulation.Sincethe
marginalcostofaddingonemoreconsumerisnearlyzero,eachNDsupplierwouldofferspecialdiscountsto
consumerswhoshiftedfromtheothersupplier.Asinthecaseofthetheoryofpublicutilities,theonlysituation
compatiblewithequilibriumisoneinwhichonlyonefirmsuppliedtheND.

ForonefirmtosupplyNDservicestoallconsumers,alltheconsumerswouldhavetomovetotheNDfirm'sdistrict.
Butasmoreandmorepeoplemovedin,congestioncostswouldincrease.Moreover,themarginalcongestioncost
wouldrise.Thearrivalofeachnewresidentwouldcauseahighercongestioncostthantheresidentbeforeher.
Possibly,therewouldbeapointatwhichthemarginalcostofsupplyingacitizeninherexistingdistrictwouldbethe
sameasthemarginalcostofsupplyinginthenewdistrictplusthemarginalcongestioncost.Ifso,longrun
equilibriumwouldrequiremorethanasinglenationaldefensesupplier.

Letussupposethatsuchapointisnotreached.Inotherwords,supposethatalltheNDofallofacountry'scitizens
issuppliedfromasingledistrict.Thesupplierwouldbeamonopolist.Considernowthesituationfacedbya
monopolistsupplier.Wehaveassumedthatthemarginalcostofdefendingadditionalspaceispositiveandthatthere
maybeacrowdingproblem.Inviewofthesecharacteristics,thefirmmightwellprovidearangeofqualitiesof
nationaldefense.Itmightofferdiscountstoconsumerswhoarewillingtolivetogetherinarelativelysmall
geographicalspace,whileitchargedahigherpricetoindividualswholivedinlessdenselypopulatedareas.This
wouldencouragedenserpopulations,althoughotheradvantagesoflivinginlessdenseareas,suchaslesscrowding
(orperhapsfarmprofits)wouldprobablyexisttocompensatesomepeopleforthehigherpriceofND.

Ofcourse,iftherewasonlyoneNDfirm,itwouldbeinclinedtochargeamonopolyprice,orrangeofmonopoly
pricesdependingonlocation.WehaveseenthatPigouvianeconomistshaverecommendedseveralsolutionstothe
naturalmonopolyproblem:marginalcostpricing,averagecostpricing,andgovernmentcontrol.Ineachcase,there
isaseriousincentiveproblem.Regulatedfirmsandgovernmentagencieshavelittleincentivetocontrolcostsand
regulatorsareatadistinctdisadvantageinknowingwhethercostinflatingmethodsofproductionarebeingused.
Also,itisdifficultforregulatorstogivethenaturalmonopolistanincentivetoinvent.Wewouldexpectthesame
resultsfromaregulatedNDnaturalmonopoly.

Ifwereliedonregulation,wecouldexpectsubstantialinefficiency.Butifweallowedthemonopolytobe
unregulated,thesupplierofnationaldefensewouldgetveryrich.Moreover,themonopolistwouldprobablyexclude
consumerseventhoughtheyvaluednationaldefenseatahigherpricethanthecostofaddingthemasconsumers.
ThereasonisthedifficultythatthesupplierofNDwouldhaveindiscriminatingoneconsumer'sdemandfrom
another's.Apossiblesolutionistograntalimitedtimefranchiseinsupplyingnationaldefenseandtorequire
nationaldefensesupplierstobidforthatfranchise.Forexample,wemightgiveanationaldefensesupplierafive
yearcontracttosupplyunderspecificconditions.Wewouldinvitemanyfirmstobidforthecontract.(2)

TheProblemofRegulatingaNaturalMonopolyinDefenseServices

ThegoalofourdiscussionofNDhasmainlybeentodeterminewhetherthefreemarketsupplyofNDwouldentail
somekindofmarketfailure.Inordertomakeourexerciseconformtothetheoryofmarketfailure,weassumedthat
anyonewasfreetoformaNDfirmandthatNDfirmswouldremainloyaltothenation.Ineverydaylife,itseems
unreasonabletoexpectthatthecitizensofacountrywouldallowmarketsupply.First,sincethecompetingfirms
musthavecontrolovermassivefirepower,theircompetitionmightturnwarlike.TheownerofoneNDcompany
mightsaytoconsumersofanothercompany'sservice"IfyoucontinuetobuyyourNDfromanothersupplier,my
companywillattackyouandprovetoyouthattheothercompanycannotdefendyouaswellaswecan."

EveniftherewaspeacefulcompetitionamongNDcompanies,thereisanoverridingreasonwhycitizenswould
prefergovernmentsupplytothealternatives.ItisthatonewhocontrolstheNDmonopolymayuseittohisown
advantage.Realistically,howcanagovernmentthatlackscontroloverNDregulatetheNDmonopoly?Ifa
governmentregulatordecidedthatthechiefofthearmedforceschargedtoohighapriceforhisservicesandshould
beimprisoned,howcouldheenforcehisdecision?Moreover,whatwouldpreventthechiefofthearmedforcesfrom
simplyappropriatingwhateverpropertythathewanted?TheownerofamonopolyNDcompanycouldpresumably
earnmoremoneybysimplytakingitawayfromcitizensthanbyprotectingcitizensagainstforeignaggressors.Thus
itseemsthatthereasonwhygovernmentssupplyNDisnotthatNDisapublicgood.Itis(1)thatNDisanatural
monopolyand(2)citizenswouldbeafraidthatifaprivatecompanycontrolledthemonopoly,theownerofthe
companymightusehispowertooverthrowthegovernment.

Footnotes

1.Indefiningnationaldefense,peopleoftenconfusethedefenseoflife,limb,andpropertywiththedefenseofthe
nationstate,orgovernment.(SeeHummel,1990,p.9498)Apersonmaydemandthefirstwithoutdemandingthe
second.Healsomaydemandthesecondwithoutdemandingthefirst.Forexample,somepeoplespeakofsacrificing
theindividualforthedefensenotofotherpeoplebutforthedefenseofthenationalgovernment.Inthistext,we
definenationaldefenseasthedefenseoflife,limb,andproperty.

2.SeeDemsetz,1966.

http://www.constitution.org/pd/gunning/issues/econ/topics/ndpubgd.htm 4/5
2017628 IsNationalDefenseaPublicGood?

References

Demsetz,Harold(1966)."SomeAspectsofPropertyRights."JournalofLawandEconomics.(October).

Hummell,J.R.,"NationalGoodsVersusPublicGoods:Defense,Disarmament,andFreeRiders,"TheReviewof
AustrianEconomics,Volume4,1990.

Copyright(c)2002

GunningsAddress
J.PatrickGunning
ProfessorofEconomics/CollegeofBusiness
FengChiaUniversity
100WenhwaRd,Taichung
Taiwan,R.O.C.
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Email:gunning@fcu.edu.tw

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