Provision of Public Goods - Why Is It Left for the Government - Essay Example

Provision of public goods: why is it left for the government? Name: Course: Tutor: Date: Abstract The provision of public goods is a huge undertaking because of the huge amounts of resources it; requires the large number of beneficiaries involved, and the lack of a market structure to provide them in a competitive manner. Since public goods should be enjoyed by everyone regardless of their input, eliciting participation of citizens on a free market environment is untenable because the free-rider effect would place immense costs of non-contributors. Various macroeconomic theories help explain how the imperfections in the market justify the involvement of governments in the provision of public goods. Free-rider is a common issue in provision of public goods in almost every economy globally. To solve such issues, governments are able to use policies that impose taxes, provide for the public necessities that cannot be left to the private sector, or privatise the provision of public goods where and when necessary, which can help fund the production and distribution of such goods, without levying heavy burdens on the individual citizen. Provision of Public Goods: Why is it left for the Government? Societies thrive at the bare minimum, on goods and services provided freely to them or without having to pay for them individually, but collectively through taxes levied by governments and other public administrators. Samuel Samuelson popularized the definition of public goods by terming them as being non-rivalrous and non-excludable in consumption (Samuelson, 1954). From an economic perspective, public goods cannot be found in a free market because of market failure and thus governments are charged with their provision to the general masses. Indeed, private sector is unable to supply public goods on their own because of their inability to coordinate their actions even when there are aware that their cooperation would produce an outcome that leads to a Pareto improvement, in which no one is harmed and at least one person benefits (Kamei, Putterman and Tyran 2015). Macroeconomic theories have been instrumental in defining and creating an understanding of public goods, explaining the market conditions that support the provision of public goods, and explaining the role of government and increasing role of the private sector is the provision of public goods. The ensuing discussion focuses on some of these theories and their contribution to the understanding of public goods and their provision to the masses. Public goods are those products and services that can be consumed without excluding anyone as well as reducing their availability to other individuals; that is, they are non-excludable and non-rivalrous respectively, as stipulated by The Pure Theory of Public Expenditure (Holcombe 1997). Common public goods include transportation infrastructure such as roads, rails and airports, drinkable water, clean air, law enforcers and the military among others. Non-excludability of public goods means that certain individuals cannot be excluded from or denied the consumption of such foods and services. In addition, non-rivalry of public goods means that the consumption of such goods or services does not reduce their availability to other people. Economic theory defines public goods as those goods, which once produced, can be consumed by additional consumers without incurring additional costs (Halcombe 1997). However, in reality, while these goods are often provided by governments and financed through public taxation for the enjoyment of the masses, some individuals may be excluded from enjoying some public goods if they do not pay a nominal charge levied for their use by governments and their agents. Another characteristic of public goods is that they cannot be rejected by people once they have been produced. The theory of free-rider problem in provision of public goods present the practicable issues that are evident even in the contemporary world. The issue is argued to occur when the targeted consumers of the public goods can enjoy without having to pay for them (Price et al., 2002). Also (Pommerehne, Feld and Hart 1994) reports that the problem of free-rider as an issue with the provision of public goods can also be realised when people are paying less for the goods, which would eventually consequent under-provision of the goods in a free market setting. Additionally, it can also be argued that public goods provision is impacted by the idea popular slogan “Let George do it” to imply that the weight and challenges of providing the public goods is left to certain people or bodies (Pettinger 2016). Therefore, one of the issues that can be associated with the concept of provision of public goods is free-rider problem. For instance, in a real world and practicable situation, there have been various government projects to provide bridges, including the 134 mitres high Sydney Harbour Bridge (Australian Government, 2008); which are amongst the many public goods in an economy; that evidently depicts the impacts of this issue free-rider in provision of public goods (Kotchen, 2012). Sydney Harbour Bridge is a government funded project, an implication that every member of the public can use it regardless of whether he or she contributed. It can be argued that the bridge project was funded using taxes as part of the capital, which not every person in the community pays. Taking as an example a bridge in a society set to benefit an average of 100 consumers, who are only willing and able to contribute $100 towards the project, would experience impacts of free-rider problem if the project is expected to utilise more capital. For example, if the project requires $15,000, it would imply that it still requires an additional amount of $5,000, which the targeted beneficiaries may fail to pay since they can use the bridge even if they do not pay. Due to such arguments and their effects, provision of public goods has been ever a challenge in almost every economy (Price et al., 2002). However, with the government intervention measures, targeted consumers get to contribute the projects without necessarily realising it. Similarly, the theory of free-rider problem in provision of public goods argues that there are certain goods from which one gets to benefit without even paying. According to the theory, imposing legislation, privatising certain public goods, and tax and government provision, amongst many others, are some of the measures that can be used to intervene to the issues associated with public goods provision (Marwell and Ames 1981). Free riders take the advantage of tax compliant citizens by avoiding incurring the cost of financing the production and provision of the public good while still wishing to enjoy the same amenity (Pickhardt 2006). However, while the quality of the public good is not lowered by the presence of a small number of free-riders, the quality and access to such a public good can be compromised greatly if the free rider proportion is very high and significant. To avoid the problem of free riding, government policies that force citizens to cooperate creates a Pareto improvements and an improvement of the social welfare as well (Bernauer and Koubi 2013). According to the Coase Theorem, markets often fail due to the absence of property rights, and in situations where negotiation between the interested parties is costly (Shibata 1971). As such, inputs and outputs related to production-optimal distribution are required and chosen, in the absence of property rights, to function in a competitive market without any transactional costs. However, different institutional arrangements are necessary for internalizing externalities thus making the externalities manageable. The Equivalence Theorem, which extends the Coase Theorem, finds that taxation is an institutional arrangement that enables the internalization of externalities (Holcombe 1997). For instance, Pigouvian taxes are employed as a disincentive aimed at eliminating any negative externality in a market activity (Holcombe 1997). In this case, Pigouvian taxes act to eliminate the prisoners’ dilemma in which private players are unable to cooperate to provide public goods in the marketplace. The provision and distribution of public goods is often influenced by politics, considering that governments are often involved in the supply of public goods. The public goods to be offered by the government are often more than the resources available to fund their provision. As such, governments are often faced with dilemmas regarding which public goods to prioritize above others (Zodrow 2013). The game theory is often employed to explain how government made strategic decisions regarding the provision of public goods (Neck 2010). Indeed, governments have decision makers who may have different interests regarding which public goods the government should provide, where these goods should be availed first and how much should be invested in the production and provision of these goods. However, despite opposing interests, such policymakers often arrive at a Nash Equilibrium, in which each participant makes an optimal decision based on the action of the other participants even when each participant has exhibited his or her best response (Samuelson 1954). However, ultimately, focus of such negotiations and lobbying should be aimed at attaining the maximum wellbeing of the society for whom the public good is aimed (Feidler and Staal 2012). In conclusion, the provision of public goods that are aimed at elevating the social wellbeing of people has been reserved as the preserve of governments because of its ability to intervene in scenarios in which market structures lack. The government has been assigned the role of providing public goods because of its ability to mobilize finances through taxes that are sufficient to create and supply such goods, its ability to decide which public good should be prioritized and its ability to minimize the free-rider effects among the citizenry due to its regulatory authority. The provision of pubic goods can be explained using the game theory that interrogates the actions of policy makers and the citizenry as players, and the Coase Theorem and the Equivalence Theorem, which explain how the government attempts to correct market failures and mobilize resources for the provision of public goods through taxation and other measures. References Australian Government. 2008. “Sydney Harbour Bridge” Australia.gov.au. Retrieved from http://www.australia.gov.au/about-australia/australian-story/sydney-harbour-bridge Bernauer, Thomas, and Vally Koubi. 2013. "Are bigger government better providers of public goods? Evidence from air pollution", Public Choice, 156.3(4): 593-609. Feidler, Janos, and Klaas Staal. 2012. "Centralized and decentralized provision of public goods", Economics of Governance, 13(1): 73-93. Holcombe, Randall G. 1997. "A theory of the theory of public goods", The Review of Austrian Economics, 10(1): 1-22. Kamei, Kenju, Louis Putterman, and Jean-Robert Tyran. 2015. "State or nature? Endogenous formal versus informal sanctions in the voluntary provision of public goods", Experimental Economics, 18(1): 38-65. Kotchen, Matthew. (2012). “Public goods”. Retrieved from http://environment.yale.edu/kotchen/pubs/pgchap.pdf Marwell, Gerald and Ames. 1981. “Economists free ride, does anyone else? Experiments on the provision of public goods, IV” Journal of Public Economics, 15: 295-310. Retrieved from http://econweb.ucsd.edu/~jandreon/Econ264/papers/Marwell%20Ames%20JPubE%201981.pdf Neck, Reinhard. 2010. "Dynamic game theory and models of international macroeconomic policy." Proceedings of the 2010 American conference on applied mathematics. World Scientific and Engineering Academy & Society (WSEAS). Pettinger, Tejvan. 2016. “Free rider problem”, Economics Help. Retrieved from http://www.economicshelp.org/blog/1626/economics/free-rider-problem/ Pickhardt, Michael. 2006. "Fifty Years after Samuelson's “The Pure Theory of Public Expenditure”: What are we Left With?" Journal of the History of Economic Thought 28(4): 439-460. Pommerehne, Werner W., Feld, Lars P. and Hart, Albert. 1994. “Voluntary provision of public goods: results from a real world experiment”, KYLOS, 47(4):505-518. DOI: 10.1111/j. 1467-6435.1994.tbo2o63.x Price, Machael E, Cosmides, Leda & Tooby, John. 2002. “Punitive sentiment as an anti-free rider psychological device”. Evolution of Human Behaviour, 23: 2003-231. Retrieved from http://s3.amazonaws.com/academia.edu.documents/8416855/10.1.1.6.6707.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1495712247&Signature=cc5EJv2DTZCAK8p3javKYNa7%2FKc%3D&response-content-disposition=inline%3B%20filename%3DPunitive_sentiment_as_an_anti-free_rider.pdf Samuelson, P. 1954. "The Pure Theory of Public Expenditure", Review of Economics and Statistics, 36 (4): 387–389. Shibata, Hirofumi. 1971. "A bargaining model of the pure theory of public expenditure." Journal of Political Economy 79(1): 1-29. Zodrow, George R. 2013. Local provision of public services: The Tie bout model after twenty-five years. Elsevier. Read More