Thursday, May 18, 2006

Monuments as Natural Monopoly

A commentator on this blog once accused me of being a closet libertarian, and sometimes I feel that way myself, but reading the blog of my libertarian friend Jeff Miron usually cures me of that delusion.

Today, Jeff says we should privatize national monuments. He writes:
This approach ensures efficient use of the land areas in question. If the most profitable use is a cultural or historical monument, private owners will choose that option. If the most profitable use is oil and gas exploration, private owners will choose that instead. And if the most profitable use is a scenic area for hikers, private owners will choose that.
The last three sentences are true, but they do not prove the first. Efficiency requires maximizing the sum of producer and consumer surplus, whereas profit maximization considers only producer surplus.

National monuments, such as the Lincoln Memorial, are natural monopolies, in the textbook definition of the term. There is a large fixed cost of setting it up and approximately zero marginal cost of an extra person walking through and seeing the statue. Average cost is declining in the number of visitors. Depending on the demand curve for visits, it is possible that it is efficient for the Memorial to exist without it being profitable for a private firm.

One might ask: Doesn't the same argument apply to all public art? Yes, it does, and it can justify government subsidies to the arts. (The same argument cannot be used to justify subsidies to the arts enjoyed in private settings, such as opera.) The argument also explains why the government runs, say, Central Park in New York City, rather than selling it to Disney to turn into a theme park or to Donald Trump to build condos.

Jeff might be skeptical of using the natural-monopoly argument on the grounds that the government is not very good at figuring out what goods to provide. I would agree. But there is a clear market failure here, and we have to weigh the market failure against the government failure that arises when the government tries to fix the market failure. It is a tough judgment call. It seems unlikely to me that weighing the pros and cons will always lead to the small-government outcome, as Jeff seems to suggest.