260the same time, taxpayers have incurred large costs; these resources could have been used for other purposes. As cases of failed interventionist policies, the biogas and Sekab experiences provide an opportunity to identify important insights into the mechanisms of interventionist policies and how the entrepreneurial state can fail. Below, we elaborate on these insights.

5.1 Public Funds and the Economics of Incentive Distortion

As seen in both the biogas and ethanol cases, the presence of large public funds for speciﬁc technological efforts seems to have paved the way for the persistence of Directionality in Innovation Policy and the Ongoing Failure of Green. . .

261these efforts, despite the facts that technological breakthroughs and commercial viability seemed rather hopeless. Public money seems to have made these ﬁrms immune to risk. The biogas initiatives were built on a business case in which oil prices were assumed to rise 7% annually. Effectively, these municipal companies were using billions of taxpayer money to speculate over oil price ﬂuctuations. Speculating over natural resources is inherently risky, but nobody seems to have questioned these efforts. The combined presence of large, public funds available both regionally, nationally, and at the EU level seems to have created an environment in which it is not only possible, but also rational, to allocate vast resources to risky and technologically impossible ventures. Consider the following hypothetical example: If someone gave you €1 million but asked you to destroy something in return, what would be the total value of goods and services that you would be willing to destroy? The hypothetical answer would be €999,999, because then you would theoretically earn €1.

The ever-present demands for co-ﬁnancing in EU projects, along with the presence of government funds, make it rational to destroy capital in reality. Elementary economics teaches that ﬁrms will produce as long as their marginal revenue is higher than their marginal cost. Put differently, if the next unit a ﬁrm considers making does not generate revenues that match the marginal cost, the ﬁrm will not make it. Applying such elementary microeconomic logic helps to understand why destruction of capital is likely to prevail. Marginal revenues equal at least the public funds received for investing in biogas, and municipalities can almost invest a similar amount of money as their marginal cost and the efforts would still make sense. Put differently, the presence of large external, public funds, and the demand for co-ﬁnancing makes it rational to destroy capital.

This argument may seem like an overly cynical theoretical construction. Unfortunately, it has signiﬁcant applicability and explanatory power. Revisiting the case of biogas above, the quote concerning “Klimp funds that should not be wasted” indicates precisely such a logic. At the point it becomes clear that the project is futile and needs to be shut down, there are still strong incentives to continue, because doing so is connected with a marginal revenue, in terms of obtaining more public money. The story of Sekab and cellulose from the forest further illustrates this pattern. Despite the technology appearing to be underdeveloped and lacking potential, investments continued and became increasingly esoteric. The fact that Sekab still continues to attract millions of euros in EU money many years after it has broken municipal laws, created debt for taxpayers, and not made any economic advances indicates how the presence of large public funds make it very difﬁcult to shut initiatives down.

262C. Sandström and C. Alm

Indirect and Hidden Costs

Organizations applying for public money may obtain large funds, yet at the same time they face an opportunity cost. The time and effort spent in order to search for, apply for, obtain, administrate, and report cannot be neglected. These efforts can be quantiﬁed but are rarely considered. It is harder to estimate the effects of lost opportunities, as these opportunities by deﬁnition will never be realized. Time and attention are scarce resources; if spent on one activity, they cannot be spent on another. In rural Sweden, the sum of all public funds from the state and from the European Union amount to at least €100 per inhabitant. As such vast resources trickle down into the local economy, a considerable portion of the economy will be devoted to dealing with these funds instead of building other ventures. While the need for real, signiﬁcant reforms is pressing in most European economies, such efforts are halted when entire regions become dependent on external funds.

5.3 Public Sector Inefﬁciencies and the Risk of Corruption

The two cases described above also illustrate how the ﬁnancial logic of public funds tends to be focused on cost rather than value. A government agency has a certain amount of money assigned to distribute over a year. If they do not spend that money in any given year, there is an apparent risk that they will miss out on that money the next year. The quote concerning “celebrating by having cake together” at one government agency illustrates this effect.