Sunday, May 15, 2005

Dominant Assurance Contracts

Pure public goods (like lighthouses) are difficult to provide through the market because of the free-rider problem - it is almost impossible to exclude someone from the benefits of the good. Many environmental services fall into this same category, and are therefore either undersupplied or require heavy government intervention. But is another way possible? Alex Tabarrok at Marginal Revolution has a post about assurance contracts which can overcome the coordination problems that come with getting individuals to fund public goods. In short, investors get their money back (or their money back plus a bonus) if the funds raised do not meet the required amount to complete the project. It's an interesting idea, and I will be thinking about how this concept can be applied to the provision of environmentally-beneficial projects and other public goods.


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