PUBLIC GOODS AND THE THEORY OF GOVERNMENT

Joseph P. Kalt

1. The Theory ofP.95481200121080.6Tm(of)T18481200economist1080.52

inequalities, which result in differences between private and social costs, as the basic criteria of market efficiency and the touchstone of prescriptive conclusions.1 The case for the expansion of the public sector based on the

CATO JOURNAL istence of the particular external effects associated with public goods, for which the assignment of property rights offers no apparent remedy. According to Samuelson, who is most commonly associated with this position because of his important formal state-

drawn associated with the market production of public goods are eliminated or reduced by transfer to the that theory of public goods is the basis a positive theory the Although the former conclusion has been under a fair amount of attack in recent years, the latter has rarely been challenged explicitly. Some economists have challenged the theory of public goods by arguing that the polar publicness is unrealistic.~Nevercaseof theless, it seems obvious that some goods do exhibit substantial publicness, and therefore the analysis here concerns itself not so much with the validity of thepublicness concept as with the institutional factors that affect the efficiency of the provision of public goods when it is accomplished through the political means. It is hoped that the analysis will also have implications for the broader questions of the logic of group action and, especially, the theory of the state. Definition publicfactorsfortheas

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the theory, it is the theoryof public goods that explicitly the vital externalinterdependencies that no theory of This paper challenges the two conclusions most frequ10ly from thetheory of public goods: (1that the inefficiencies public sector; and (2) for of the state.

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lotions xj and collective consumption goods (X,, ,. X,,+m) 1 which all enjoy in common in the sense that each individuals consumption of that good leads to no subtraction from any other individuals consumption of that good, so that X~~~=X~j simultaneously for each and every ~thindividual and each collective con= - -

~kj;

sumption good.

Given this formulation, publicness can be seen as joint supply in the

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CATO JOURNAL the inefficiencies associated with the private provision of public goods must be corrected by state action. That this is the conclusion of most e616omists is perhaps beyond dispute. Indeed, it may be the most prevalent, and to some the only, prescriptive conclusion in all of e616omic theory. Certainly most students of e616omics encounter it in their introduction to public finance. Then, too, Samuelson has chosen to call histheory a pure theory of public expenditure. Possible breaches of thewertfrei dictum notwithstanding, however, if it can be shownthatthere are reasons to believe that the state provision of public goods is inefficient, then the prescriptive conclusion is unwarrantedon a priori grounter

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and transportation facilities pose no uneconomical pricing problems. Other public goods such as neighborhood recreation facilities, natural scenery, and even defense services can conceivably be efficiently priced and produced through tie-in arrangements with private goods.6 Similarly, the presence of exclusion costs does not necessarily imply the presence of jointness. If, for example, non-purchasers of such private goods as automobiles cannot be excluded from consuming (through theft) these goods, each individual will have some incentive to allow others to purchase automobiles for him to consume (steal). A free-rider effect, then, will prevail if for some reason there are significant costs to excluding non-purchasers. Although some economists have expressed a desire to redefine public goods as those goods for which exclusion is impossib3-i~ such a definition is not what is uset31is

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Efficiency Requirements under State Provision The conditions of efficiency in the provision of public goods, as put forth by Samuelson, are independent of institutional arrangements. If we view the compulsory tax payments collected by the state as the prices of public goods that individuals pay254618Tm(the367582Tm(under)T

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CATO JOURNAL tion would upset attempts to establish an efficient taxing scheme in the interests of the community. In the complete absence of benevolence, however, a despot would presumably act to distribute tax burdens in a manner that maximizes his own utility, subject to certain cost constraints (see section 3 below). The personal incomemaximizing distribution of tax burdens bears no necessary, one-to-

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It should be obvious that, ceteris paribus, no rational (in the economic sense) man would

CATO JOURNAL chasers of a public good is not economical, there is a benefit to demand distortion and to trying to get others to pay for the provision of the good. In the calculus of the individuals of the controlling groupof a public good, private benefits will tend to exceed private costs.32 The consequent inefficiencies in state of public goods seem to be as fundamental to as they to the market mechanism, and thus we seem to have gone beyond the

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that the nature of individuals altered according to the institutional

CATOJOURNALIfourwelfareeconomicsis to berigorous,it isimportanttonote notadequatesubstitutesforunanimityitself.In

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unanimity in the formation of the state.4That is, it is a widely accepted view that individuals agree to coerce themselves in undertaking collective, state activity to overcomem(view)Tj11.20e8610Tm(collective)Tj10.900

CATO JOURNAL (before an apparent change of heart),43 and Tullock, who have recognized the external effects resulting from the shifting of private costs through a system of political decision-making, tend to view such consequences as aberrations of an institution oee272599a50001599Tm1o0bns

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etc., that are produced. There is thus an incentive for each individual to avoid the costs (such as tax-prices) of joining the state in the hopes that other individuals join. (Joining would be defined as voluntary acceptance of a central agency of intimidation.)47 If the conclusion of the public goods theory of the state is that government compulsion is necessary to overcome the free-rider effect associated with the production of the state, then the theory implies the necessity of some as a means of producing the state. The obvious implication is an infinite series of preexisting states. If the test of a is not only the validity of its

prexistnga

theory

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allocation. A number of considerations, however, suggest that the conditions that make competition in the marketplace such a socially productive force are unlikely to be so prevalent in the political

sector. In the nondemocratic case, the essence of despotic rule is its monopolistic characterand such rule is all too common. Of course, even in the absence of competition, a monopolistic, wealthexpropriating government has incentives to pursue its objectives with minimal distortion to economic efficiency. Efficiency prorsuemotes maximization of the sources of gain for despotic rulers. The incentives to minimize distortions to efficiency may entail the prorsueduction of goods that have attributes of publicness (for example, national defense). Unless one adheres to the naive assumption of complete altruism, however, it could not be argued that such govrsueernmental provision of public goods is the purpose or raison dtre of that government. Moreover, the of evidence clearlyindirsuecates that the economic performance of despotic decision-making has been poor to the extent that the econrsueomies of market mechanisms have been eschewed and the negarsuetive incentive effects of governmental expropriation have been unrestrained.
Forms of nondespotic, democratic political decision-making gen-

informat/cd

erally provide relatively greater scope for competition. The salutary consequences that n-iight result from this competition, however, are limited by the inherently nonmarket nature of decisions made under democratic rule. Specifically, competition in the private marketplace guides Adam Smiths invisible hand most effectively when, as Hayek has stressed,5 a continuously operating market allows repeated marginal adjustments in the behavior of buyers and sellers and produces a steady stream of relatively cheap inforrsuemation on such behavior. The political marketplace, however, meets relatively rarely; when it does voters are presented withrsuea bundle of numerous and durable choices that cannot be marginally altered. Moreover, political competition is plaguedby high transacrsuetion costs; the changes in the -bundle of policies offered by the government are substantial. In deed, these relative to partic pation and acquisition of information are blunted

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directly with their dollars and, as noted above, the inherent public good attributes of collective political decisions. Even in the absence above,abovebargaini28Tm1g0c81601(aboven106Tm(5i011017smalud1

CATO JOURNAL resource allocation under both market and state provisionfor precisely the same reasons in each case. The battle among wertfrei scientists over the role of the