The political economy of public goods: why economists should care.

The intent of this article is to encourage economists to analyze questions of public involvement in the array of public and private activities where public participation is an issue. The scope encompasses goods and services where there is the most universal acceptance of public involvement and extends into less clear distinctions of quasi-public goods and merit goods. The concern here is not so much with the definition and bounding of different categories of goods and services as with the need for considered analysis and assessment of such goods.

It is increasingly important to understand public and related goods as public perception changes and public and private resources are being shifted between them. What we have is a continuum with pure public goods at one end of the continuum and pure private goods at the other end. The public and policy makers regularly make judgments about the public and private provision of goods and services on the basis of perceptions about the nature, cost, and efficacy of such goods. In recent years public perceptions have shifted and redefined public goods more as private goods. If economists can clarify, rationalize, and determine the cost effectiveness of different approaches to providing such goods, then they need to engage in the analysis of these public and quasi-public goods and assess whether they are appropriate for public expenditure, privatization, or some combined support between the two extremes.

Wassily Leontief's presidential address "Theoretical Assumptions and Nonobserved Facts" (p. 1) delivered in 1970 to the American Economics Association is a good starting point for such analysis. First, there is still truth in his basic criticisms of the state of economic analysis. He also praises agricultural economics implying an advantage to this sub-discipline of economics in undertaking assessments of the kind being proposed here. Reflecting on his feelings about the state of economics, Leontief was first encouraged by the degree of relevance of the practical problems that his fellow economists were addressing, but he was concerned with "the palpable inadequacy of the scientific means with which they try to solve them" (Leontief 1971). What he identified was a lack of internal validity, where the data or methods were insufficient or inadequate to address the question at hand. Leontief's concerns focused on a lack of attention to the observable reality of the economic phenomena under consideration as well as a lack of attention to real supporting data for analysis of these phenomena. He was equally concerned that economists had not been willing to reach beyond the limits of economic phenomenon to other disciplines relevant to the issue at hand--to the engineering sciences for production and to other social and behavioral sciences for better understanding of basic household behavior in order to turn up new factual information highly relevant to the economic analysis.

In the course of his criticism of his peers in economics, he also recognized agricultural economics as an "exceptional example of a healthy balance between theoretical and empirical analysis and of the readiness of professional economists to cooperate with experts in the neighboring disciplines" (p. 5). He mentioned the extensive agricultural statistics, close collaboration with other agricultural and social sciences, and the early utilization of advanced methods of mathematical statistics as a complement to and not a substitute for empirical research. We can only hope that agricultural economists have not fallen into the bad habits of analysis that Leontief decried and that agricultural economists have maintained the virtues claimed for them. The characteristics that Leontief praises are important for giving adequate attention to issues resulting from the changing public perception of public and quasi-public goods and assessing what it means for society.

Economists place most public goods in the arena of market failure. A common textbook definition shared by Baumol and Blinder (p. 256) defines a public good as "a commodity or service whose benefits are not depleted by an additional user and from which it is generally difficult or impossible to exclude people, even if people are unwilling to pay for the benefits. These are socially valuable commodities whose provision cannot be financed by private enterprise, or at least not at socially desirable prices. Thus, government must pay for public goods if they are to be provided at all." It may be difficult, costly, or impossible to collect fees for the public goods provided. In addition, if the opportunity cost of serving an extra user is zero, then the good should be provided at no charge. Private goods are at the opposite end of the spectrum and are both depletable and excludable. Baumol and Blinder go on to say: "It is usually not possible to charge a price for a pure public good because people cannot be excluded from enjoying its benefits. It may also be undesirable to charge a price for it because that would discourage some people from benefiting, even though using a public good does not deplete its supply. For both of these reasons, government supplies many public goods. Without government intervention, public goods simply would not be provided." Following on this definition they identify "national defense, public health, police and fire protection, and research as among the services governments provide because they offer beneficial externalities or are public goods." While it may appear clear how one might define public goods so that they can be precisely identified, in fact policy and public perception can effectively redefine such goods. Most societies go through periods when public goods become quasi-public or private goods, and the reverse can occur as well. This is part of the political public policy debate over what goods government should be involved in providing or supporting because they offer beneficial externalities as compared with providing them through the private market.

Scripture like references to Adam Smith are often invoked to demonstrate the efficacy of more private market-based solutions for the provision of public or quasi-public goods. The debate over the role of government involvement in the provision of public goods was underway during Smith's time in the latter part of the 18th century. If nothing else, Smith was a pragmatist and talked about those goods and services government ought to provide in a non-doctrinaire way that reflected the political and social reality of his times. Smith was not a Libertarian, but Jacob Viner (p. 200) suggests that he started from the near-Libertarian stance: "Little else is required to carry a state to the highest degree of affluence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things." Smith stressed extending his system of natural liberty through the abolition of the then-existing systems of government regulation that included the free choice of occupation, free trade in land, internal free trade, and free trade in foreign commerce. There was joint benefit here for both individuals and the public interest, which had been hindered by the interference of government. Smith is arguing in reaction to traditional and social strictures and the mercantilist regime of trading monopolies and chartered companies. He was particularly concerned about the negative impacts of monopolies and repeatedly stressed that they were disadvantageous to the public.

While desiring to restrict the activities of a central government that exercised substantial control over individual economic choice, Viner (pp. 217-18) notes that Smith identified three duties for government: national defense, the administration of justice and "the duty of erecting and maintaining certain public institutions and certain public works." Viner sees Smith arguing against those specific actions of government he believed injurious to the individual and to society, while also believing that government activity was natural and appropriate when it promoted the general welfare. One thing to recognize here is that public or government administration in late 18th century England was often inefficient, unintelligent, and corrupt. Smith made specific exceptions about the extent of government's role for the higher quality public administration of Venice and Amsterdam that enabled them to be more positively involved in the affairs of their citizens. Smith firmly endorsed the role of government in defense (his first role for government) and extended this to strategic goods as well. He held a broad view of the government role in justice, including enforcement and punishment. For his third role related to public support for certain institutions, he supported government involvement in: setting standards and promoting consumer labeling; enforcing contracts; protecting slaves; regulating currency and banking; and setting fire regulations so the acts of a few did not endanger all. In terms of public works, one of his criteria for assigning government responsibility for roads was that private management would not have the incentive to maintain them properly. An additional criterion for public involvement was whether government could make a profit from the function (i.e., be a better trader or manager than private enterprise for that function); if so, then it was an appropriate public function.