First let me reiterate what I wrote to Joe in a private email. My guess is that there would actually be very little demand for such a levee prior to there being a levee. It is the development that has come about after the levee was built that has created a demand for it. This is the moral hazard. If there were no market for a levee, then there would be no levee. This truly is a case of supply creating its own demand. If there were no levee, then NO would be a much smaller city.
Your question about how private entrepreneurs in a free market might provide a levee is asking me a question that I do not have the answer to, nor should I be expected to. If we lived in a world where all shoes were produced by government it would probably be difficult for us to imagine how shoes could be produced otherwise. After all wouldn’t people all go barefoot if the government weren’t providing the shoes? Shoes have to be gotten to every corner of land, to people in remote areas. How could all of these “costs” be overcome without a grand central coordinator like the state? No one could possibly earn a profit and shoes would go unproduced.
The point is that entrepreneurs have always found innovative ways to deal with costs of all kinds including transaction costs to provide services that those of us who do not have such insights and are not faced with potential profit opportunities do not imagine. My guess is that there are probably historical examples where private entrepreneurs provided levees and worked out the logistics to earn a profit. After all, for many years it was thought that the private sector couldn’t possibly provide light houses, then Ronald Coase went out and proved them all wrong.
All this said, if, in the absence of coercion, levees were not produced I would have to conclude, both from a moral perspective and economic perspective, that they shouldn’t be produced. To know otherwise would require all the knowledge of a central planner. Maybe you could tell me how you would know. BTW, the fact that levees–like light houses–might meet the standard, stilted, and contrived economics definition of a “public good” does not in any way alter my opinion on this.
