Potential Welfare Losses in the Public Sector — Anatomy of the Nature and Causes

Abstract

One of the main topics which economic science has been concerned with for some considerable time is the potential uneconomic use of limited resources and the wastefulness of the intermediate and final product by the consumer. Science has developed refined models and methods which help to explain and measure both the suboptimal utilization of resources and the deviation from the Pareto-optimum, however that may be defined. After much time and thought, economists ingenuously came up with a rather hybrid theory of market weakness and failures¹, which was used to justify and account for state intervention in the market, or else for its elimination or substitution by the state², but which did not answer the crucial question: Does the state utilize the limited resources more economically than the market? Indeed, we know relatively little about the efficient and just provision of public services and the removing of market disadvantages. In short, we have no definite theory of consistent ideas about state weaknesses or public failures, although there are, of course, elements of such a theory in public economics (see Buchanan (1968) and Recktenwald (1980)).

“Economy is a distributive virtue and consists not in saving but in selection... Parsimony (and profligacy, HCR) requires no providence, no power of combination, no comparison, no judgement.”

Edmund Burke (1953, p. 19)

I am grateful to Karl-Dieter Grüske and Astrid Rosenschon for patient reading, querying and useful comments and to J. Buchanan, H. Hanusch, A. T. Peacock, R. A. Musgrave, W. A. Niskanen, and W. Stolper for helpful suggestions.