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Don’t Be So Quick to Conclude that Supply Chains are Public Goods

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Here’s a letter to the Wall Street Journal:

Editor:

William Galston writes that “Resilience in the face of unexpected shocks is a public good, and experience is confirming what economic theory predicts: In the relentless quest for increased efficiency, which remains a key source of competitive advantage, the decisions made by individual market actors will produce, in the aggregate, a less-than-optimal supply of resiliency, a public good. To solve this collective-action problem, government must act as a counterweight” (“Efficiency Isn’t the Only Economic Virtue [2],” March 11).

Not so fast. Each company has powerful incentives to strike what is for it the optimal balance between keeping its current production costs as low as possible and ensuring against disruptions of its supplies of inputs. Equally important are these two additional facts. First, each company has better access than do government bureaucrats to the detailed knowledge necessary to strike this balance optimally and, second, the optimal balance for one firm differs from the optimal balance for other firms.

In short, nothing about striking this balance optimally fits economists’ criteria for being a public good.

Mr. Galston thus too quickly concludes that the coronavirus’s disruption of supply chains ‘confirms’ that the market produces less-than-optimal levels of resiliency. Today’s disruptions are no more evidence of market failure than are the supply-chain disruptions routinely sparked by hurricanes and earthquakes. Even less is the coronavirus’s disruption of supply chains evidence that government officials could and would ensure better than do private companies against excessive disruptions of supply chains.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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