In March, a gaming company called Double Fine sought funding for their next project on Kickstarter.
Kickstarter is a website where you can pledge to fund creative projects. The project sets itself a money target and a deadline. If enough people pledge money to hit the goal, then their credit cards are charged. If the goal is not achieved by the deadline, nobody pays.
Double Fine aimed to raise $400,000 in a month. In fact, they raised $1 million in 24 hours. The rest is history: total donations came in at more than $3 million, and the computer gaming industry went into a Kickstarter frenzy.
Websites like Kickstarter mitigate some of the problems facing projects with big startup costs. Suppose you are creating a computer game or a film or a ballet. You could sell advance tickets, but if you don't get enough, the project will fold before completion. This makes your potential customers nervous about handing over cash. And the nervousness can be self-fulfilling; if an investor thinks other people will be cautious in handing over cash, that makes it less likely that the project will hit its minimum, so s/he gets more cautious too. Kickstarter fixes that by guaranteeing a refund.
These projects are like what economists call club goods. The marginal cost of producing the second copy of a computer game is (much!) lower than the marginal cost of the first copy: software is partly non-rivalrous. Kickstarter and other crowdfunding websites make it easier to produce club goods. A first cousin of the club good is the public good, which is non-rivalrous and also non-excludable. I.e., whereas you can stop non-payers attending an artistic performance or downloading a computer game (well, maybe...), you cannot stop non-payers enjoying a public good. Those are the goods traditionally produced by governments: clean air, national defence and so forth.
Could crowdfunding transform the public sector?
Suppose you want the local park to be tidied up and get some new flower beds. You could pay for someone to do the work. But the benefit you personally get will be much less than the cost, even though the benefit to everyone might greatly exceed the cost. Your other alternative is to lobby the town council, perhaps joining with others, to provide this public good. With enough persistence you might get your way. Of course, governments are overburdened with demands, often inefficient, and perennially underfunded, so you may not have much luck. Well, those are your choices... until now.
Now, you can set up a Kickstarter project and a Facebook group to fix the park. Like-minded citizens can contribute some minimum donation. They know that if the project doesn't hit its goal, their money will be refunded. The biggest donors get their name on a park bench, just as big donors to video games get a personalized character in the game.
Crowdfunding solves some, not all, of the problems of providing public goods. It makes people more sure that their money won't be wasted; and it could provide a credible signal of unmet demand to government. (So in year 2 of your project, the council might realize the park is a big issue for voters and agree to fund further improvements.)
It doesn't solve the problem of non-excludability. Kickstarter can offer game copies only to contributors. You cannot ban non-contributors from the park.* So there will still be a temptation to free-ride on others.
One tweak would be to change the conditions. So, your pledge will be redeemed only if the project meets its goal funding and if everyone in the park's surrounding area pledges some minimum. Now, for those in the area, not contributing will result in the park not being improved. This condition makes every contributor pivotal, and that weakens the temptation to free-ride.
I don't know how much unmet demand for public goods is hidden out there, but I suspect there is a lot. By tapping it, crowdfunding could cause a governance revolution, making the public sector much more open, flexible and decentralized.
* Actually, you could do that. Kew Gardens charges £15 for entry. My inner economist approves, but my inner citizen feels that parks should be public.