Paying for Public Goods

Summary of: Paying for Public Goods

Author(s) / Editor(s)

Scientific and technological developments such as the Human Genome Project, GNU/Linux, Global Positioning Satellite data, file-sharing distribution of music and cinema, the cost of drugs for global epidemics such as AIDS, has necessitated new models for paying for public goods, such as compulsory licensing, competitive intermediators, and nonprofit matching funds.

Publication Reference

Published in/by
Code: Collaborative Ownership and the Digital Economy, Rishab Aiyer Ghosh, Ed., MIT


  • In science, public health, and cultural commerce, tensions between economic interests and public good is necessitating innovation in ways to finance public goods.
  • A combination of state-compelled (e.g., compulsory licensing) and market-mediated means (competing intermediaries) could prove fruitful in providing new financing models for cultural production (e.g., music, cinema), public health (pharmaceuticals), software (GNU/Linux and other open source software) and science (Human Genome Project)

"This chapter examines the problem of financing public goods in three settings. Two efforts combine a degree of state coercion in mandating funding, with a decentralized and competitive private sector model for allocating funds. The first is the problem of compensating artists in a world where the most efficient distribution systems are peer-to-peer file-sharing networks. The second concerns the problems of funding the development of new drugs and other medical inventions. Finally, a proposal for new intermediators to facilitate voluntary collective action to finance public goods is considered."

Making DNA sequences centrally and freely available resulted in valuable innovations, such as the software tool BLAST that performs 500 trillion sequence comparisons annually.

"In a series of workshops at New York and Banff, Canada, a group of artists, lawyers, and economists looked at practical issues of how a compulsory license might work, and like most such inquires, discussed how one might set or collect fees, with alternatives such as levies on purchases of computer equipment or bandwidth, or various systems for subscription services, based either upon a flat rate or the amount of downloaded music. Some thought the fees should be paid directly from general tax revenue. There was no group consensus about these issues, but there was an appreciation that it would be good to structure the fee so that it was in some sense free on the margin (similar to how one now pays for cable television or subscriber-based radio services), and that it would be a positive feature if listeners could freely experiment with unknown artists or music types, thus contributing to discovery, growth, and opportunities for new artists."

How to allocate funds was not settled. Would some money be available to finance public goods that are not supported by the marketplace, such as experimental music or recording/archiving folk music? Should artists and studio musicians have a say? The workshops proposed that for part of artist compensation, intermediators would compete against each other and listeners could decide where to put their money. It was suggested that several experiments should be conducted and evaluated: "The Blur/Banff discussions were seeking to find a way that the listeners and artists could build a new social contract that would compete with and possibly replace t he current system of distributing and marketing music. It would seek to liberate the art from the consequences of marketing the art as a commodity. If the P2P model was successful, the expenditures on marketing would fall, and the greater share of resources would be available to artists themselves."

Health care R&D, especially research into new drugs, poses another problem. Although government grants to scientific research through academic institutions supports fundamental research, drug development is carried out by pharmaceutical companies, whose patents enable them to repay the considerable development costs — but the prices bear no relation to the cost of manufacture. The social dilemma balances the self-interest of the pharmaceutical companies who seek rents to justify lengthy and expensive development, and the needs of nations faced by epidemics such as AIDS whose citizens cannot afford access to commercially available drugs. WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires all but least-developed economies to issue patens on medicines. "This suggests a potential modification to the TRIPS agreement to allow countries an alternative way to contribute to global health-care R&D by ensuring that a fixed fraction of their GDP is being spent on supporting health care R&D," releasing such countries from their obligation to allow patents that block generic drug manufacture. Systems for efficiently collecting funds, and how to use them to fund innovation without marketing monopolies are outstanding problems to be solved.

Authors suggest competitive intermediators to "control the allocation of resources to companies and academics carrying out R&D, but not carry it out temselves (as this would be a conflict of interest). Instead each intermediator would concentrate on embracing the business model for resource allocation that it believed was the most efficient for drug development.." Prizes for R&D outputs, small grants, peer-reviewed open research projects are suggested. "Intermediates could also adopt "open" research agendas, since the ability to raise money would not be linked directly to product sales. If employers or individuals believed open research was more productive than proprietary R&D, more money would flow to open R&D projects." Consumers could possibly enjoy savings from reduction in marketing spending, which is a far larger component than R&D in pharmaceutical sales.

Another model, developed in a 2002 Rockefeller dialogue on collective management of intellectual property goods, focuses on lowering transaction costs for voluntary financing for a wide range of public goods by creating a kind of eBay marketplace, matching seekers with philanthropies, individuals, and corporate entitites. "The Matching Funds proposal is to create a new institutional framework that would make it easier to match willing funders and willing suppliers of public goods. The institutional framework would be an intermediator called Matching Funds (MF). The role of MF would be to provide due diligence on proposals for new public goods, and if the review was positive, to list the projects for subscribers." The public could critique the proposal and suggest modifications. "Subscriptions would be binding commitments to fund the project if sufficient support for the project was forthcoming from the community of persons who wanted the project done."