What would happen if we were to view a much wider variety of public goods as being susceptible to market-based price discovery, for instance, in the way that commodities such as gold or petroleum are traded in both spot and futures markets?
(The Blockchain Swiss Army Knife, Consensys) and
(Co-Founder, DLx Law) reimagine the equitable allocation of public goods through tokenization. This white paper introduces a novel, fair method of tokenizing impure public goods that carry some level of scarcity.
Naturally occurring public goods (e.g., water, forests, beaches) are often thought of as “free” public utilities—something with a virtually unlimited supply that can be consumed without any direct economic cost.
We are all considered the “owners” of these public goods. In most cases, we do not expect to be “charged” for their consumption. Because we tend to think of these public goods as abundant, we fail to think about their truly limited supply or the need to provide equitable access and fair allocation.
Although there is a general acknowledgment of an economic cost to many human-made public goods such as highways, airports, and libraries, there is little thought given to the effectiveness of cost-recovery schemes.
Pure vs. Impure Public Goods
In economics, a public good is a good that is both non-excludable and non-rivalrous. Economists further segment public goods into “pure” and “impure.”
A “pure” public good is one where an individual’s consumption of the good does not in any way impact others’ opportunity to consume the same good and where, as a practical matter, individuals cannot deny each other the opportunity to consume the good.
An example of a “pure” public good is street lighting: one individual’s enjoyment of the lighted street does not in any way detract from that same enjoyment of others. Likewise, it is not possible to light a street for some individuals while excluding others.
What interests us here are “impure” public goods—those where at least to some extent the consumption by one individual negatively impacts the ability of others to do so (i.e., there is some level of scarcity).
Challenges with the current impure public goods fee structure
Due to many factors, it is difficult to construct a market for many impure public goods.
There are economic costs involved, and limitations in access (not everyone can visit a park, bask on a beach, or simultaneously enter a congested downtown area).
Additionally, many practical frictions limit how available resources are allocated and how costs can be recovered.
As a result, the true economic value of impure public goods and their optimal usage can be difficult to determine.
Fees for accessing and maintaining public goods be it tolls or admittance fees, tend to be structured as flat amounts that do not reflect the complex dynamics of both supply and demand.
Until recently, we lacked the technological means to let markets address the cost allocation problems of public goods at scale.
A market-based pricing architecture for impure public goods
We will use the example of congestion pricing in an urban city to illustrate market-driven prices for impure goods.
Congestion pricing is an instructive example of an “impure” public good. There are a finite number of vehicles that can safely occupy a geographic area at a single point in time (scarcity), and, with some effort, access to that area can be limited, or at least observed (excludability).
Token model, distribution and usage
Potential models for market-based congestion pricing are straightforward to construct:
Every resident of a city is issued a finite number of digital access receipts for the congested area free of charge. In this exercise, we’ll say one access receipt per day for a year for simplicity. Let’s call these receipts “tokens” – this term will be familiar given how mass transit systems have used physical tokens in the past.
Those tokens are valid for an agreed period (say, one year), and new tokens are issued periodically to eligible citizens.
Every driver of a vehicle needs to pay (i.e., transfer to the municipality), say one token, upon entering the congestion zone of the city during certain hours of the day. The access right of the token expires once the driver and vehicle leave the congestion zone.
Tokens are destroyed once used.
Drivers of vehicles can buy one or more tokens in an open marketplace.
Token prices are set in the marketplace based on supply and demand (perhaps at least initially with government-set minimum and maximum prices).
Algorithmic tools could be developed to allow travelers needing access but without tokens to simplify purchases by pre-setting parameters to various preferences (e.g., minimize cost, plan-ahead as far as possible, prioritize travel flexibility, etc.).
The token can only be used to access the city’s congestion zone and nothing else.
The city may reserve the right to issue additional tokens as a “safety valve” if the demand for tokens is significantly outstripping token supply at any one point. Minting supplemental tokens avoids the potential for excessive “surge pricing”—similar to what ride-sharing providers use to incentivize drivers to come online to increase the supply of drivers when the demand for rides significantly outstrips supply. We recognize that a completely unchecked market can create undesirable short-term pricing distortions. These distortions would need to be managed either centrally through a third party such as a municipal agency subject to appropriate oversight and transparency, or programmatically through rules embedded in the exchange protocol. This is an important point with far-reaching consequences, and we will discuss it in more detail when we explore the economic and social implications of our model.
Since impure public goods by definition have some level of scarcity, they could become expensive to access. If a marketplace for that access is established, some market participants can be expected to attempt to game the system to gain an “unfair” advantage, as is seen in almost all open marketplaces. We will discuss examples of potentially malicious behavior of participants and how to mitigate it once we have discussed the functioning of the marketplace itself.