Abstract
This paper raises an old question and proposes a new answer. The question is, “Must public goods be produced by governments?” The consensus answer is “Yes,” on the grounds that transaction costs related to group size prevent all potential consumers of a public good from entering into voluntary arrangements to produce efficient levels of that good. Government intervention thus is required to achieve efficiency.
Yet many obvious examples of public goods are not financed or even subsidized by government. Conspicuous examples of this phenomenon include the development of important innovations in technique in fields such as music (Bach and Beethoven), literature (Defoe, Dickens and Shakespeare, not excepting Homer or Adam Smith), and the visual arts (Cezanne), not to mention many crucial scientific discoveries. Indeed, the obvious public-good aspects of scientific knowledge induced many private societies to offer prizes for particular innovations. Two questions are raised by the private, voluntary provision of nonrival outputs or inputs: (1) what conditions contribute to this phenomenon, and (2) can voluntary provision come “close” to efficient provision? We suggest in this paper that, under certain conditions, the gains from many public goods whose benefits reach nationwide populations are largely realized at group sizes far smaller than even county or municipal jurisdictions.
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Notes
One familiar example of private voluntary provision of non-rivalrous goods is the organization and financing of Little League Baseball on a world-wide basis. Participation in this activity as well as attendance at games is free of charge. While the issue of the property of exclusion may be raised against examples of private, voluntary creation of such public goods as musical and literary compositions and scientific discoveries, it is difficult to make convincing arguments against examples of voluntary private provision of non-excludable public goods. The case of Clara Driscoll and the Alamo is brought to mind. When the Alamo was about to be converted to a hotel in San Antonio in 1903, and the state’s governor declined to come to the support of the Daughters of the Republic of Texas, who sought to preserve it for posterity, Clara Driscoll, heiress and official of the DRT, led a fund-raising effort to find the money to purchase the property. When those efforts proved completely inadequate, Driscoll paid the required sum out of her personal funds.
Of course, if the public good in question is charitable giving, then altruistic preferences are essential. But our analysis applies generally to situations in which public goods are provided solely in order that the contributing individuals can consume their direct service flows.
Our assumption of identical preferences dispenses with the problem of finding the vector of Lindahl “taxes” (in this case, voluntary contributions) that makes each person’s revelation of his preferred level of the public good incentive-compatible. What we wish to know is the minimal size of a perfectly cooperating group that is necessary to attain a given level of efficiency in voluntary public-good provision. Considerations of negotiating costs within such groups do not affect our findings. Instead, they affect the likelihood that a group of any particular size will form.
This is the simplest pair of comparative-cost assumptions for the two methods of provision. A comprehensive comparison of the efficiency of private and public provision would take into account both the internal organizational costs of the cooperating subgroup and the administrative and marginal deadweight costs of tax finance.
To verify that this is an equilibrium of this hybrid game, it is necessary to verify that the best response of each of the noncooperating households (indexed by k) to this level of provision by the cooperating group is \(C'_{k} = 0\). We know from the solution to the fully noncooperative game that any noncooperating household k’s best response to the contributions of the cooperating group members is
$$C_{k} = \max\bigl[(1-\varPsi )E_{k} - \varPsi G^*(m) , 0\bigr]. $$If the households outside the cooperating group have the same endowments as do the households in the cooperating group, then C k =0 if m>1/Ψ. If this condition does not hold, then the cooperating group is too small to effect an increase in the provision of G above the fully noncooperative level. Since our aim is to explore the possibility that such a group can be effective, we henceforth assume that the condition m>1/Ψ is met.
If m/n=0.5, L(m,n)/nE i =0.0516.
The equilibrium level of voluntary provision G′(m), potentially depends on the subgroup’s response to any voluntary provision by nonmembers of the group. It is clear that nonmembers will contribute nothing, because any group that contains more than one person will choose for itself a level of G(m)>G′(1), so that no one who is outside this group will choose to contribute or provide anything beyond what the subgroup is willing to provide.
A restriction imposed by our specification of the utility function is that the marginal rate of substitution is not defined when the cost of the satiation level of G exceeds the subgroup’s collective income.
Four is the minimum subgroup size that yields a determinate demand over the entire range of values of G.
Harberger (1984) provides a clear exposition of this point.
Consider, for example, what proportion of the nightly television programming available on digital cable or satellite that any single consumer watches in spite of having access at zero marginal cost to all of it. What is the value to even ardent music lovers of another symphony composition, given that few, if any, have themselves heard even a single performance of every one of them that already has been composed and recorded.
For example, much of Haydn’s music was produced when he was employed in the Esterhazy household to compose musical entertainment exclusively for the family and their guests. Jane Austen penned Pride and Prejudice as a young woman still living at home, to be read aloud for the enjoyment of her younger siblings.
There does appear to be some stirring of private space travel, which could occur if “α” is high enough either for a rich hobbyist or because of an idea that profitable mining might be possible on other planets.
Government support of smaller explorations, even those which satisfy the nonrivalry condition, does not serve efficiency. Scouts hiking in the woods need no government support to bring back an adequate supply of firewood.
Activities requiring little capital and substantial labor lend themselves particularly to such voluntary efforts because that contribution can readily be self-monitored. The cost of monitoring to limit principal-agent problems is one of the major deterrents to successful voluntary organization. This certainly limits attempts to organize such production through the method of voluntary contributions to non-proprietary firms.
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Acknowledgements
This paper as well as others was presented at the 2011 meeting of the Public Choice Society in San Antonio, at a session commemorating the work of a dear friend and colleague Earl Thompson. It goes without saying that the field of public choice and scholarship regarding public goods would be weaker today without Earl’s contributions in such works as his “Perfectly Competitive Production of Collective Goods” (Thompson 1968) and “Taxation and National Defense” (Thompson 1974). We are grateful to John Lott, Tom Borcherding, Ben Zycher, and the members of the Workshop in Public Economics at Clemson University for valuable comments.
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Lindsay, C.M., Dougan, W.R. Efficiency in the provision of pure public goods by private citizens. Public Choice 156, 31–43 (2013). https://doi.org/10.1007/s11127-012-9942-z
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DOI: https://doi.org/10.1007/s11127-012-9942-z