Intervening for the surplus

Paul Walker asks whether consumer surplus can ever justify government intervention. Arguing against Sam Richardson's contention that consumer surplus from the Rugby World Cup can justify government intervention, Walker notes:

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

What's Walker missing? If there's a market failure preventing the realisation of potential consumer surplus. Imagine that the local folks putting together a bid for the RWC set up their bid optimally with respect to maximal extraction from those who could attend games: lots of tiered pricing, lots of tied sponsorship arrangements, lots of merchandising. And the bid were just shy of making it. And, suppose further that each and every Kiwi got $10 in warm fuzzies just from pride in knowing the event were here being held. If there's no market in which they can express their preference for the event's being held, and if the event wouldn't be held absent the contribution from those folks who'd never attend a game but who would enjoy benefits, then that can be an argument for government intervention.

Now, the warm fuzzies can be internalized through sponsorship arrangements: if those not attending the game get warm glow from the games, sponsors may capitalize on that warm glow. But we'll specify that the $10 per person is over and above any amount that can be capitalized on by sponsors.

In that case, you could argue for government involvement. You need a market failure of some sort to make the CS argument for intervention hold. It's not nonsensical on first principles. But it's rather unlikely that we've been made better off by the investment. Why?

First, we'd have to know that the potential CS made it worth the cost.

Second, we'd have to ask why alternative mechanisms for solving the coordination problem among those experiencing warm glow weren't attempted. KickStarter is an awesome mechanism for this. You put up your project and your required funding threshold; folks pledge money and are only called on for funds if the collective willingness to pay is high enough. Sure, there could be free rider problems, but there are ways of turning assurance contracts into dominant assurance contracts. If RWC never even bothered trying KickStarter and went instead immediately to the guys who can use guns to force your contribution, we might be sceptical that they really believe that there are net gains to the public (or that the latter is just easier for them).

Finally, we'd have to weigh up whether the losses from bearing the market failure - the forgone benefits - really justify the costs of intervention.

I'd put 20:1 against that the NZ government's investment in RWC meets any kind of sane cost-benefit analysis. There are states of the world in which such investments can be optimal; we're just rather unlikely to be in that world.