Why do I think the government should consider using prizes as a way to drive domestic policy goals? Well, the most substantial problems facing humankind are problems associated with the Tragedy of the Commons, henceforth TOTC. The TOTC is when the costs associated with production are externalized (e.g., pollution) Since internalizing those costs typically involves enforcement and those enforcement costs are born by individuals who may not directly experience the damage of the externalities, in many instances the equilibrium solution is to allow over consumption/production of resources with vast externalities being absorbed by unaffiliated entities or to enforce so ineffectively as to allow the problem to persist.
The vast majority of problems in society are solved via the free market system, meaning not everyone is negatively influenced by every problem but private entrepreneurs develop solutions to solve problems that are both niche (bridge from point A to point B) and broad (development of polymers). In the bridge example, only a small portion of the population may ever use the bridge, whereas almost everyone in the world benefits from the use of plastics.
With TOTC problems however, individual entrepreneurs have no incentive (or not a sufficient enough incentive) to solve the problem and thus those problems persist. I would argue that the use of prize incentives instituted by private or public institution is the most effective method to solve TOTC problems.
The Netflix Prize and the X-Prize Foundation are two modern examples of how financial incentives can bring market forces into play to solve complex problems. The benefit to the sponsor is that the prize is only awarded if all the criteria are met. So rather than the Department of Energy allocating limited resources to the projects that they think will have the best probability of success, by offering a prize, let’s say, for scalable solar cell production under some commercially viable threshold, various ideas compete using private capital and the public funds are only used to reimburse the winner. The market will attract private capital to the best ideas and the prize money will serve as the exit strategy for competing ideas/entrepreneurs. The social welfare of the citizens is maximized and could be done so further if the government uses an insurance provider as the actual payee and pays an annual premium for the ability to offer such a substantial prize.
Why isn’t the Dept of Energy using prizes in this way? Why are they investing in projects in states that are green and yellow in terms of kWh/m2/Day? Why not bring private market forces into the equation yielding entrepreneurs from all over the world seeking to maximize efficiency in renewable energy production?
