Crowding Out

When governments provide a service or product, others providing that service or product often get crowded out. But how, exactly, does that crowding out take place? There are a variety of ways this can happen.

The first and most obvious is the government can declare itself as having a monopoly on that service or product and make it illegal for others to provide that product or service. The Post Office is -- or, was -- a good example of this.

A second way is for the government to subsidize its products or services with tax money, thus allowing them to undercut the prices of any potential competitors. This is what we can expect to see in the "public option" of Obamacare.

However, a less obvious way is by affecting the psychology of the citizens. If the government starts providing a service -- a philanthropic service, for example -- then in many people's minds that problem is being taken care of. More, it is being taken care of with their tax money. That being the case, there is no real reason to make private donations to private providers of that service. Thus, donations decrease and fewer institutions provide that service. Welfare is a good example of this -- as government poverty relief has increased, charitable donations to those who traditionally provided such relief decreased, and the burden increasingly shifted toward government-provided welfare.

This latter is perhaps the most insidious, as it results in competition going away in such a way as to be less obvious -- and in such a way as to make it possible for the government to argue that if they did not provide the service, it would not get provided.