Former journalist and city councillor Nils Torvalds wrote a column last sunday in the newspaper Hufvudstadsbladet on the debate on the planned Guggenheim Helsinki museum. A major motivation for building the museum has been the alleged increase in tourist inflows that the museum would bring to Helsinki. Among the beneficiaries of this we presumably have restaurants and hotels.
Torvalds thinks it shortsighted of these private beneficiaries to free ride by not willing to contribute towards the costs of Guggenheim. In terms of moral, this might be the case. Nevertheless, a lot of investments have similar kinds of externalities, ie. they benefit somebody else than the decision maker (ie. the City of Helsinki in this case).
In theory, it would be good if you could make the beneficiaries of these externalities pay for the benefits they receive. Nevertheless, this is often not feasible. To see why, consider the decision making of an individual restaurateur. His benefits from the Guggenheim is not enormous. And even if it was, what are his incentives to pay for it? Is everybody else's investment in Guggenheim really conditional on his investment? That is, if he were not to invest, will the project falter, and if he is to invest, will it really be build? It would seem unlikely.
Due to these kinds of externalities, investments with this kind of public good features are often financed with tax funds, as the costs are then covered by the general public, who also receives the benefits. And mind you, those greedy, short sighted restaurants are also paying taxes.
Nevertheless, even if we ignore what is practical at the moment and think in moral terms ("The restaurants should pay") we still have some problems with the suggestion. Let's say that the current restaurants and hotels pay for the Guggenheim. Even if we somehow could convince every single restaurant in Helsinki to pony up exactly the sum by which they benefit from the Guggenheim, would we then have arrived at a equitable solution?
The answer to the question must be no. Even if we can force the currently existing restaurants to pay, the alleged influx of new tourists would probably lead to new restaurants being started. New restaurants which wouldn't have started if their older competitors hadn't paid for the Guggenheim. So we're back at the free riding problem. Which really is solved using the public purse. That is of course, provided that it makes sense for the public sector to invest in the project...
