Samuelson

A theory of public expenditure

 Analyzes the optimal public expenditure in the Pareto optimal sense (i.e. no one can be made
better without making anyone worse off)
 Private consumption and collective goods
 Collective goods everyone enjoys in a sense that no one enjoys without making anyone worse
off
 He assumes two types of goods, private consumption goods and collective consumption goods.
The former is rival – one person’s consumption is at the cost of another person’s consumption.
The latter is non‐rival – different individuals can consume the same unit of the good
simultaneously.
 Given conditions of production, individual welfare functions and the social welfare function,
there is a “best state of the world,” i.e., Pareto efficient bundle of private consumption goods
and collective consumption goods.
 The policy implication he drew  was that laissez‐faire reliance on markets and voluntary
exchange public finance both lead to sub‐optimal outcomes by not getting the community to the
ethically best point on the utility frontier.  
 For these, individuals can hide their true valuations, hoping to free‐ride on others. The free‐rider
problem bedevils equally the market and voluntary public finance. So through neither can the
“computational problem” be solved in a decentralized manner.
 The failure of market catallactics in no way denies the following truth: given sufficient
knowledge the optimal decisions can always be found by scanning over all the attainable states
of the world and selecting the one which according to the postulated ethical welfare function is
best. The solution “exists”; the problem is how to “find” it (1954, p. 389). How to find it? He
suggests that one might “indoctrinate” each member of the community to behave like a
“parametric decentralized bureaucrat,” i.e., to be honest about their valuations. But we cannot
expect people to conform to the indoctrinated rules. So Samuelson leaves us with two
“computational” methods that do not work, the market and voluntary‐exchange public finance,
and with no sense of what a workable alternative might be, if indeed there is one.

TIEBOUT

 Consumer voter
 Voting with your feet
 moves to the community which best satisfies the voter preferences
 more communities, more variance ore the consumer will come to fully realizing preference
position
 local government model
o assumptions
1. Full mobility
2. Full knowledge
3. Many communities
4. Restrictions due to unemployment not considered
5. Public service no external economies of diseconomies with other communities
6. There is an optimal community size
7. Communities below the optimal size seeks to attract more residents

 local governments have a more precise and detailed knowledge of the needs of the local
population- making them more readily able to accurately tax the people on the goods and
services it provides to the local population.
 He later describes municipalities within a region as offering varying baskets of goods
(government services) at a variety of prices (tax rates)
 Given that individuals have differing personal valuations on these services and varying
ability to pay the attendant taxes, individuals will move from one local community to
another which maximizes their personal utility
 through the choice process of individuals, jurisdictions and residents will determine
an equilibrium provision of local public goods in accord with the tastes of residents,
thereby sorting the population into optimum communities.
 The model has the benefit of solving two major problems with government provision of
public goods: preference revelation and preference aggregation.