The Nordic Model - Embracing globalization and sharing risks

that everyone gets their worth as measured by the value that the
market puts on their contributions. Distributional issues have to
be dealt with through taxation, social security and other government
policies and, of course, through informal arrangements within
families and communities.
Distributional concerns underlie many public services, such as
schooling and public health. A big reason why the public sectors
in the Nordic countries are so large has to do with the perceived
need for collective risk sharing, as we discussed earlier. The question
that we will address here, however, is whether some of the
services could be offered more cheaply through the private sector,
even when the public sector finances them (partly or fully). This
leads us to consider reasons for having publicly produced, not just
publicly financed services.
Competition enhances
efficiency, distributional
issues are a
separate matter
8.2 EXTERNAL EFFECTS AND PRIVATE
ORGANIZATION
In assessing the efficiency of coffee service, we only considered the
value created for the shop owners and their customers. This is fine
as long as the coffee business does not harm or benefit anyone else.
If the coffee shops disturb the neighborhood at night, or if they
bring more shoppers to the neighborhood during the day, profit
maximization will not take into account all social benefits and
costs. There would be external effects, or externalities.
In economic textbooks, externalities are always paired with
government intervention of some kind. It could involve corrective
taxes as in the case of congestion, or new property rights such as
tradable “pollution rights,” that force the firms to bear the external
costs and benefits that they cause. Other externalities can rationalize
publicly provided services, as we will discuss shortly. But it is
important to note first that firms can “internalize” many externalities
on their own, without the need of government. Indeed, the very
existence of firms and the determination of the lines of business
that they pursue are in large part driven by the value of internal
coordination of activities that decentralized market trades would
Governments and
firms are both designed
to deal with
externalities – but of
very different kinds
138 · The Nordic Model