Mike Madison responds to my earlier post on wireless in Pittsburgh’s Market Square. I argue that the businesses would benefit from the wireless, and thus have an incentive to pay for it. Mike responds:
The answer is pretty obvious, at least to me: The city, or some public authority, is the right entity to be involved precisely because it’s far from clear that the businesses in and around the square and PPG Place either would, in fact, benefit from this, or would recognize those benefits, to such an extent that they would be willing to underwrite the cost of the network. It’s an empirical question, right? Figure out who the relevant businesses are (do we count street-level only, or do we count tenants of PPG Place?), and ask them: If everyone chipped in, would you be willing to fund some share of a wireless network for that space? My guess is that the answer would be no. But I’m happy to be proved wrong.
Wireless connectivity in public spaces is, I think, what economists would call a public good, and that means that we shouldn’t be so quick to write off government involvement in setting it up in the first place. Or, if the private sector does get this off the ground, then some government entity should be closely involved in regulating both services and prices, so that the public truly gets what the public needs.
I don’t think the answer is as easy as Mike does, because I don’t think that wireless connectivity is a public good, at least not a pure public good. A public good is something that is nonexcludable (I can’t prevent you from consuming it) and nonrival (your consumption does not reduce my consumption). Wireless connectivity is nonrival up to a point, but it is congestible. Furthermore, we know that we can password protect and/or charge for access, which means that it is excludable. Thus on a purely technical level, wireless connectivity is not a public good.
As a congestible club good, though, it presents a challenge: how do you coordinate the group of businesses to get the thing provided? I think this coordination requires leadership from the party/ies that would have the highest expected benefit. This is where the Buchanan and Stubblebine distinction between relevant and irrelevant externalities becomes important: if these businesses have hetergeneous preferences over installing a wireless network, some of them will value it more, and will therefore be more willing to pay for it than others. Yes, other businesses will benefit from it, but their marginal benefit is small, and if it’s small enough, their free riding on the other businesses won’t keep the wireless network from being built.
The challenge here is figuring out which businesses would benefit the most, and presenting them with the opportunity to increase their profits by doing this. Here’s where I’d start: The Market Square Association:
The Market Square Association is a Pennsylvania non-profit corporation formed in 1970. The primary purpose of the Market Square Association is promoting social welfare by improving, beautifying, and furthering the redevelopment of the Market Square area in the City of Pittsburgh including, but not limited to, the physical and commercial environment.
Some of the Market Square member merchants are cafés, bakeries, and restaurants; for them I think the value proposition is pretty straightforward. Other members include Web Spinners web application design and web hosting, and Cricket Wireless Communications. The organization exists, the technology providers are located there and are members of the organization. I would encourage them to take the bull by the horns and do it! They could collaborate with PPG and the shops and restaurants of PPG Place to enlarge the value proposition.
I also suggest not asking local businesses if they would benefit, and if so, how much, because these businesses have every incentive to behave strategically and misrepresent their true values. If you think the city is going to pony up regardless of your answer, you have an incentive to overstate your value. If you think the city will charge you for your share of the cost based on the benefits you estimate, you have an incentive to understate your value.
Wireless connectivity is not a public good, even though the benefits it generates are difficult for the providers to capture in their entirety. But the providers don’t have to capture all of the benefits, they just have to capture enough of the benefits to make it worth their while. In this case, they have a merchant association that reduces the transaction costs of capturing enough of those benefits.