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    CamScanner 10-25-2020 20.07.07 PDF

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    areeba anjum

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    CHAPTER THREE PUBLIC GOODS 3-1 INTRODUCTION “The main objectives ofthis chapter are threefold. First, the intention is to define the concept of public goods and discuss the conditions necessary for Pareto-optimal provision of public goods. To do this it wll be necessary to explain the chararacteristics ofa public good. A second objective is to consider those goods which, though not pure public goods, nevertheless bear some of the characteristics of pure public goods. An attempt is made to outline ways of providing a taxonomy of goods according to the degree of publicness that they possess. Finally, the question is raised of the provision of such goods in the market or by government finance and/or production. Wil individuals reveal their preferences for such goods so that governments may provide them in a Pareto-optimal way? “These objectives are quite narrowly defined, hut throughout the chapter itis our intention to use the analysis of public goods as another illustration of the difference in approach between the traditional’ public finance scholar and the public choice scholar. In traditional public finance theory the conclusions that arse with respect to the conditions that are required to produce an ‘optimal’ quantity of the good are virtually identical to those developed by the public choice school. It should be noted that in this chapter the difference between the two stands proud in terms of their respective methodologies. The standard methodology of traditional public finance js in terms of the maximization of a function (e.g. utility function, social welfare function) subject to constraints (eg. a given state of technology and a fixed supply of factors of production). By this methodology, the conditions for ‘eficient’ resource allocation are established. In chapter 1 the technique was outlined with respect to an economy that produces private goods, and in section 33 below the same approach is demonstrated with respect to an economy that produces a public good ‘Buchanan (1986) is critical ofthis almost mechanistic approach to economics; by comparison, he stresses a methodology that looks at the interaction between individuals in the economy. He focuses upon the processes of exchange, which affect how resources are allocated. Such analysis is described as the study of politcal economy. “Effciency’ is determined not so much by those ‘mathematical conditions that emerge from the maxima of a constrained social welfare function, but by the consent of individuals to proposals for the reallocation of resources. Buchanan's approach to the optimal provision of public goods would be that ofa contractaian solution, whereby individuals are prepared to accep the atendant tax’ or, rather, ‘exchange’ arrangements associated with public good provision. 9 ocdiilicu Wilil vain ———e_—_—_”" {60 rustic FINANCE AND PUBLIC CHOICE Buchanan's position has been consistent. Tn 1986 he wrote: os a i Sno shat should esonomsts do? My 1962 as well What should evo en a natimising paradigm from is domi ee inte of he sears contait thal ne setings -.. stil id choles masis on the free rider and Tabedher oF not te reveal a preference. pocas” agcemrption ars coatinue with the view ‘Pron sy Buchanan (1968) has shown that, it se goods some agreement may be forthooming ‘3&2 Bargaining in 2 Small Group Te bas alzeady besa shown in section $3 that in general equilibrium the Pareto-optimal dons forthe prov pantal equilibrium the (vertical) sum of the mai marginal cost. Ae comenhat diferent way of deriving this same rule can be established by following the approach of Buchanan (1968). As Congleton notes, vn ofa public good are that V3, MAS), = MRT, and equivalently in nal benefits of individuals should equal the actaras's approach tothe analysis of pubic goods reaches the same cogcision about the optimal level of & pubic pool bet vin a iret route As escal bs line of reasoning emphasises the private exchange anal Bochasen the optimal level ofa pais good is simply the amount that exhausts all potential gains to trae, given nit exdoaments and some specication of property rights (Congeton 1988p. M4, It is well worth studying this particular derivation because (a) it confirms the conditions for ‘optimal provision of public goods and (b) it shows that, where bargaining is possible, there are = jn which individuals may agree to the ‘tax’ conditions required for the provision of public goods. ‘ In Fig. 35 the demand curves for a public good for two individuals A and B are shown as , and D, (assumed identical for expostional simplicity). To help the exposition, the marginal costs MC of providing a public good are assumed constant. In part (a) the demand curve of individual A represents the most that she would be prepared to pay towards the provision of a public good. As it never covers the marginal costs of providing the good, individual A alone ‘would not consume any of the good. In part (b) the same is seen to be true of individual B; alone he cannot cover the marginal costs of providing the good. In part (b) the curve S, represents the minimum that individual A would require to supply the good: ie, itis the vertical difference between the demand for the good on the part of ocdiIlicu WILT Udl nsec TT PUBLIC FINANCE AND PUBLIC CHOICE Price Price MC Oat @ oy Out Figure 38 Providing a public good by voluntary co-operation. individual A and the marginal cost of the good as shown in part (a). In part (b), individual B would be willing to pay Ot, per unit of Og? units of the public good, but, at minimum, individual A would require only that B pays Ot, per unit in an agreement to provide Oq? of the good. There are then clear gains to both from bargaining, and this form of bargaining is possible up ‘oan output of Og", For quantities up to Og! the amounts that both individuals are prepared ‘o pay per unit will cover the total costs involved in providing the good, At this point individual A and individual B will each pay Ot, and each will enjoy a consumer surplus as shown by triangle ¢ Pl. Since voluntary co-operation is possible up to, but not beyond, output Og!, this output level would be one that is optimal against the criterion that individuals must consent to such an arrangement, Bargaining over the question of whether output should be increased by one ‘more unit can lead individuals to output Oq' but certainly no further. This output level, it should be noted, is one at which the consumer surplus enjoyed by both individuals is maximized, I i also the point at which, by definition, the sum of the marginal benefits (i. the vertical a of D, and D,) is equal to marginal costs, The quantity of the good Og! accords with the output at which the sum of the marginal benefits is equal to the marginal cost. Since itis always possible, up to this point, to find a basis for agreement between individuals by which one individual can be made better off without another being made worse ‘off, increasing the output of the public good to Og! would be a Pareto improvement. It is also a move to which each person would agree, The approach to determining the output and cost-share of a public good is similar, though not identical, in nature to that presented by Erik Lindahl (1919). ion 3-5-3 The Lindahl-Johansen Solution ‘As long as there are some gains from trade in the provision of public goods, it can be expected ‘that some mechanism might arise to secure some of the gains, In an early contribution, Lindahl ocdil pustic Goons 73 1919) dis - ihe See rate of the determination ofthe optimal provision of public ods and in that it tackles thi Xx shares. This approach was revised by Johansen (1963) and is interesting, From meenes the question ina bargainingype contest, Two ‘individuals A and B gain util rom a private good X and a publie good G whose tax share ish for A and (1 ~ H) for B. With given total revenue ¥ divi : fo individuals will be ivided between A and B as ¥, and }, the budget constraints of the Y= X,+he (3-7) = -h (8) so that heh +(1-n6 Y=Kth +X, . 69) The conventional price consumption curve can be illustrated as in Fig. 3-6. The price consumption curve for A is derived by varying h from zero to one. As I falls, the equilibrium points (1, 2, 3) suggest the conventional outcome, i. that more public good is demanded at a Tower tax share. Whereas the original utility function for A and B (ilustrated below for A) takes the form U, = U(X, 6) (3-10) Y= WX 6) 11) itis convenient in the analysis to express them in terms of h and G, which can be done by rewriting (3-7) and (3-8) as X= Y= hG (3-12) X= %- (= WGE (3-13) x, o & Figure 346 The pie consumption curve forthe private and publi ood OULAIIIEU WILT Gal oC 7A. PUBLIC FINANCE AND PUBLIC CHOICE | | fet tea| (20 be1 | (hye theo Figure 3-7 Price consumption curve between tax shares and the public good, so that the utility functions become = Ul, 6,6) ou) U, = ULY, - (1-1), G] (3-15) This enables a counterpart of Fig. 3-6 to be constructed, with the axes labelled for tax shares h And the public good G (see Fig. 3-7). The slope of A's indifference curve between G and h is the ratio ofthe marginal utility of Gto the marginal utility of h, which can be derived in two steps as follows: ou, MUG = T,). Individual 1 would pay a Clarke tax of 30 (ie. he reduces net welfare of the “others” by 30 to the extent that, ithe did not vote, individual 2 would be better off by 50 and individual 3 would be worse off by 20), Voter 2 pays no tax; her vote did not change the outcome, Voter 3 pays a tax of 10 as his vote does alter the outcome and the difference between the two sums involved without his vote is (50 — 40). ‘Table 3-3 The mechanics of the Clarke tax peace eee ee Option R Option S Cal 1) ene scene Voter 1 40 0 2 0 50 3 20 0 Total 0 50 OUAIINIEU WILT Gal ot 80 PUBLIC HINANCE AND PUBLIC CHOICE ; ection of R, either If individual 1 had overestimated her preference in order to aa ea ae are than the she would have no effect on the final outcome or she would run the Learn tne value of R to her. For example, suppose that individual | had claimed (fase) Mist Be re that that option succeeded. In the option R was worth 80 to her in order to make sui Gaal athe way in wha er that option wins it doesnot fet ber Clarke tx asthe tax is based on h supose that the vote changes net welfare (and in this case it is still 50 ~ 20). However, evens ion di dividual 2 had said that the option exaggeration did alter the outcome. Suppose that in ins. Now the Clarke worth 70, and in this way ensured that option S exceeds option R and wins. ee tax for individual 2 would be based on the change in welfare estimated as a result of her ae hich would now be equal to 60. Remember, the diflerence is estimated in the absence of t individual's vote. If individual 2 had not voted, | and 3 would have gained 60 from the option R and there would be no welfare loss (in the absence of 2) from not having option S. Therefore, the tax for individual 2 would be 60, and ths is greater than the ‘true’ value of having option S instead of option R. Clearly, there is no gain in overestimating preferences—either it makes no difference or it results in losses. Suppose instead we look atthe potential outcome from under-revealing preferences. Suppose that individual 1 decided to under-reveal her preference and claim that she benefited by only 20 from option R In this case, while she would pay no Clarke tax (because her vote does not change the outcome), she would not receive the option that is worth most to her, Alternatively, if she claimed she would offer 35, then option R would be accepted, but her under-revealing of Preferences would not mean that she paid any diferent Clarke tax: the Clarke tax is based on the dtference in sums without her vote, and this remains $0 ~ 20 = 30. 1n this way the individual fiher gains nothing by under-reveaing or stands to lose the option that offew: her the most benefit. Though the principle ofthis Clarke tax is clear-cut, it poses many practical difficulties, of Which the following are examples. First, the money raised in the tax cannot be returned to voters, To return the money would be fo incur the likelihood that individuals would change their demand for the good and thereby negate the exercise, It is argued however that, as the number of voters increases, the tax surplus is likely to become less important (see Tideman and Tullock 1976), Second, coalition voting must be prohibited or else the » following example, based on Ng (197), illustrates this point Table 3-4 The effect of coalition voting een Option M—— Option a) (t,) oe Voter 1 40 0 2 o 50 3 20 o 4 o nr) 35 ————____* Source: based on Ng (1978) ocdiilicu Witll& 1130 N to toi the 100 = —40). Neith those voters who h: “paradox of votin, is worth 100 to her and voter 4 the Clarke tax, voter 2 will ler voter 2 nor voter increase the net benefit of the remaining voters Puntic Goons 81 lowever, su . ; of 15, Howes 'PPose voters 2 and 4 form a coalition. Voter 2 agrees to claim that option ii is prepared to claim thi N th 90 to aggerating th bi rat option N is wort cee eng nS demands for this option, they secue its attainment. However, when it comes I pay (40 + 20-90 = —30), while voter 4 will pay (40 + 20 — 4 has a tax liability because their votes actually appear By Third, there is always the possibility that, being unbounded, the Clarke tax might lead to Pankruptey for the individual concerned. I is not clear how you deal with the preferences of ‘ave affected the outcome but who cannot subsequently pay the Clarke tax. Fourth, the success of the Clarke tax depends upon there being a motivation to vote on Part of individuals. The whole mechanism may run foul of what has been referred to as the voting’ (Downs 1957). This is discussed in gredter detail in the next chapter. The essence of this paradox is that, because the individual is one of many voters, she feels that her vole is of very little consequence in determining the outcome and therefore is unprepared to incur the costs of participating in the vote. (See Chapter 4 for a discussion of this argument.) 3-5-6 Preference Revelation in Large and Small Groups Before moving on from the question of fre riding, itis worth highlighting one of the conclusions that emerges from the preceding discussion, From the review of the free rider literature, once again there is another set of ‘inverted’ results associated with the private and public good opposites. The incentive for non-revelation can be seen to vary sensitively with the numbers involved in providing the good and the nature of the good. In Table 3-5 we outline a taxonomy which may be used to contrast the public and private good situation according to the numbers involved in consumption. The observation that preference revelation is likely to be a function of the size of the group is important for rescarch in this area. Indeed, with respect to the Clarke tax, one interpretation, of this voting mechanism is that, for the provision of a public good, it transforms a ‘large’ group scenario into one in which the individual feels as though he is a member of a small group. The function of the Clarke tax mechanism that is relevant here is that it changes the game to one in which the individual is made aware of his impact on everyone else. In a sense, while the group is large in number, there are now only two players that are relevant: the individual and ‘everyone else’ (see Cullis and Jones 1987). Table Nos. ‘Small Large 35 Private ahd public goods Private goods Strategic behaviour or demand revelation will let equilibrium prices; therefore quitea strong \ incentive to act strategically. Strategic behaviour on demand revelation will not affect equi- librium prices greatly; therefore litte incentive to distort prefer- ences. Preference revelation Less likely Very likely Public goods Cost shares substantial—failure to reveal demand means supply reduced dramatically, therefore likely to reveal (may distort but reveal some preference). Cost share minimal if failure 10 reveal has little impact; there- {ote will try to ‘free-ride’ Scanned with CamSc Preference revelation Very likely Less likely $2 uate FRANCE ND PIC Cats 36 MERIT WANTS AND MERIT GOODS Musgrave Familiar in public france and social defines it in the foll terms: obey texts is the coeuept of 2 ment wa Sack wa of feet sohe mactst wc set by services subject joe prince and are sac vedemaad They become pubic wanss f comand xo menace tha the buduet yer and above what peovided fe $y pene avers (Musgrave A long and intermittent debate has taken place over this concept Ont problem is the issue of why, and how, an outside agency can keow b dividual what is in his own (long-term) interests. Arguments advanced to sustain this approzch typically boll down to two ifficult matters. One concerns information and th lity. A key question for the different contributions is the extent to hi consistently into the neoclassical framework and, in particular, the value judgement that each individual is the best Judge of her own welfare. Information has characteristics that make it arguments and can be introduced into the framework that way. Knowledge and information are non-rival, in that their use does not decrease the total available. Indeed, they may be supra-non-rival, in that, if earning takes place, use may actually increase the quantity available. This suggests that it is likely to be inefficient to use the market to achieve exclusion. Furthermore, the nature of information makes exclusion difficult. It is possible to know the value of information to you only after you have it, but then you have an incentive to avoid paying for it. Furthermore, the passing of information from one individual to another makes it difficult for an originator to maintain a property right over its use. These considerations suggest under-provision in the market. In terms of consumer-type goods, it is those whose quality is dificult to inspect, and/or are seldom repeat purchases? and which involve harmful consequences or side-effects, that are the most obvious candidates for policy concern. There is then a basis for information provision in some circumstances, but its appropriate production and dissemina- tion method is likely to be open to debate. However, what if an efficient quantity of information is present and individuals still appear to do the wrong thing? Rationality is a difficult concept. Economists have, as part of their framework, actors who act purposefully (know their preferences, ranking alternatives, etc) to their best advantage (not necessarily defined in a narrowly self-interested way) and generally adopt the value judgement that each individual is the best judge of her own welfare. As Mishan (1981b, p. 10) points out, this may be a judgement of fact (a belief that individuals generally are the best judges of their ‘own welfare), a judgement of morality (it is appropriate to act as if individuals are the best judges of their own welfare), or a judgement about political expediency (itis politically expedient, in the Western world at least, to act on the assumption that individuals are the best judges of their own welfare)‘ Whatever the basis of the judgement, it is part of the economis’s ‘story’ How can the judgement be suspended in some parts of economic analysis, without it smacking of inconsistency and arbitrariness? Mooney (1979) has an escape route in which individuals choose (in their own best interests) to delegate their decisions to government—they choose to have what would have been their individual choice ‘corrected’. If there is a lack of information, the individual may not think that she ought to make a decision on such and such. Mental and other limitations may make some people feel unable to make decisions, They may think some issues are ‘too big’ for them and they may not want to have the responsibility for making decisions. Despite these ‘rationalizations’, commentators remain rather sceptical of the concept ocdiilicu Will varS¢ PUBLIC GoODs 83

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