151 Samuelson

Samuelson

Public Expenditure THEORY

 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.