ALTERNATIVE

DELIVERY METHODS

OF PUBLIC GOODS Prof.Dr.Coskun Can Aktan

Dokuz Eylul University

Faculty of Economics & Management

&

Social Sciences Research Society

http://www.sobiad.org

BACKGROUND

The theory of public goods was first developed and debated by the continental public finance economists, notably Ugo Mazzola, Knut Wicksell, Erik Lindahl, Emil Sax and others. However, the theory of public goods stayed in its infancy until the 1950's. Modern public goods theory can be attributed to Paul A. Samuelson.

Following Samuelson, other important contributions to the public goods theory were by R.A.Musgrave and J.M Buchanan. Their contributions were the cornerstones of the modern public goods theory.

DEFINITION

Samuelson's definition gives two characteristics of

public goods: Indivisibility ("...can not be parcelled out

among different individuals") and Joint Consumption

("all enjoy in common."). The result of those two

characteristics is that once a public good, in

Samuelson's terminology "collective consumption

good" is produced, any given unit of the good can be

made equally available to all. According to the definition

of Samuelson, extention of the supply to one individual

facilitates its extention to all. In other words, supply of a

given unit to one individual, and supply of the same unit

to other individuals are clearly joint products.

The goods can be classified mainly into

two groups

Pure goods and impure goods . A pure public good, what Samuelson calls "collective consumption good" has mainly two characteristics: Indivisibility and non-exclusion. Indivisibility refers to the utility of a good which can not be parcelled out among different individuals.

Since a pure public good is consumed collectively, it is impossible to exclude some individuals to benefit them. For example, exclusion is infeasible for such goods as air pollution control, street lighting, national defense, broadcasting TV, law and order etc.

Pure Public Good

Professor James M. Buchanan, in his classic book on public goods gives the orthodox definition of a pure public good.

According to the orthodox analysis of public goods, the polar case of a pure public good is pure private good which is defined as "divisable" and "excludable.”

A pure public good has some other characteristics that a pure private good usually has not. These are:

Externality,

Free rider poblem

Forced rider

External Economies-Free Rider-Forced Rider

External economies are defined as the consumption and/or production activities of an economic unit which affects, the benefit/and or cost functions of other economic units either positively or negatively

Another important characteristic of a pure public good is that a "free rider" problem. Individuals do not need to reveal their preferences concerning which pure public good should be provided, since they know that even without revealing their preferences they benefit from services.

On the other hand, a pure public good may have a "forced rider" characteristic: The term of "forced rider" explains that the supply and the demand for some particular public goods may be obligatory.

Impure Goods

Basides the polar cases of pure goods -that

is pure public and pure private -there are also

some other type of public goods. The other

type of goods under the rubric of "impure

goods".

"Club goods", "common-pool goods” and

"merit/demerit goods" are the main types of

impure public goods.

Main Characteristic of a Club Good

A club good is an impure public good whose

benefits are excludable, but partially nonrival. The

main characteristic of a club good are two:

1.Excludable benefits: An exclusion mechanism

could be installed at a reasonable cost.

2.Partially non -rivalness: Benefits are shared by

club members. In other words, there is no rivalness

among club members.

Club goods can be classified into two groups; quasi-

public goods and toll goods.

Quasi Public Good

A quasi -public good is akin to the pure

private good in the sense that it has both

divisibility and exclusion features. However, a

quasi -public good generates either positive

or negative external economies. As a matter

of fact, externalities are the distinguished

feature of a quasi -public good. Education

and health are two main examples of quasi -

public goods.

Toll Goods

Another type of impure public good is "toll

goods" or it can be called "exclusive club

goods". Toll goods are partially indivisible

(non-rival) goods whose benefit are shared

by club members. Exclusion mechanism

could be installed in return for a fee or a user

charge, that is "toll".

Common Pool Goods

Common-pool goods, on the other hand are

divisible, however exclusion is difficult or

sometimes expensive to implement. There is

no need of payment to obtain or to use this

type of goods.

Fishing in the sea or ocean, extracting

minerals from nature, hunting in wild

mountains or jungles etc, are some examples

for common pool goods.

Merit Goods and Demerit Goods

Merit goods and Demerit goods are another type of

public goods. The concept of merit goods or "merit

wants" was first introduced by R.A. Musgrave.

"...Merit goods may be defined as those of which,

due to imperfect knowledge, individuals would

choose to consume too little. Symmetrically,

"demerit" goods may be defined as those of which,

due to imperfect knowledge, individuals would

choose to consume too much."

Table: 1 Merit/Demerit Goods and

Externalities. Type of good Emerging Externalities Government Intervention

Merit Goods Positive Externalities 1. Encouraging production by

Grants

2. Encouraging consumption

by voucher system

3. Tax incentives

Demerit Goods Negative Externalities 1. Discouraging production by

Pigovian taxes

2. Regulation on both

production and consumption

Table IV-1: Public Goods And Their Characteristics

Type of

PublIc

Goods

Divisibilit

Rivalry)

Indivisibility

(Non-rivalry)

Exclusion/

Non-

exclusion

External

Economies

Economies

of Scale

Free Rider Forced

Rider

CHARACTERISTICS OF GOODS AND SERVICES

PURE GOODS

1.Pure public

Goods

(Inclusive club

goods)

Examples:

defense against

nations,

judiciary

Indivisible Joint

consumptio

n

non-

excludable

May occur May

occur

Free rider

problem may

occur.

Individuals with

out revealing

their

preferences

benefit from

services.

Individuals may be

forced to demand

some services.

Conscription and

elementary

education are

examples.

2.Pure Private

Goods,

Examples:

Shoes, bread,

automobile,

Divisi

ble

Individual

consumptio

n.

Excludable

.

Do not

occur. Or it

hardly

occurs.

May

occur

There is no

free lunch.

Individuals are

free to demand for

goods and

services.

Source: Aktan, 1992: 31-32

Table- IV-1: (Continued) Public Goods And Their Characteristics

CHARACTERISTICS OF GOODS AND SERVICES

Type of

PublIc

Goods

Divisibilit

y

Rivalry)

Indivisibi

lity

(Non-

rivalry)

Exclusi

on/

Non-

exclusi

on

External

Economies

Economies

of Scale

Free

Rider

Forced

Rider

Impure Goods

3.Exclusi

ve Club

Goods

3A.

Ouasi-

Public

Goods

Examples:

Education,

Health etc

Partially

Indivisible

Individual

or joint

consumpti

on.

Exclusion

mechanis

m could

be

installed in

return for

a fee.

Occurs.

External

economics

are the

basic

feature of

these

types of

goods

May occur No free

rider

Individuals

may be

compelled

to

demand.

Contagiou

s disases

are

examples

Impure Goods

3-B.Toll

Goods

(Exclusive

club

goods)

examples:

Power,

gas, water

supply,

turnpike

highways,

cable

TV.etc.)

Partially

Indivisible

Individual

or joint

consumpti

on.

Exclusion

mechanis

m could

be

installed in

return for

a fee

May occur Occurs.

Economie

s of scale

is a basic

feature of

these

goods.

No free

rider

No forced

rider

3-B.Toll Goods

Impure Goods

4.Commo

n-pool

Goods

Examples:

Fish in the

sea,

minerals in

the ocean

etc.)

Divisible Individual

or joint

consumpti

on

Exclusion

is difficult

to

implement

.

May occur May occur. There may

be free

riders.

No forced

rider.

4.Common-pool Goods

Impure Goods 5.Merit/Demerit Goods

5.Merit/De

merit

Goods

Examples:

elementary

education,

help for

poor, elderly

etc.

Examples

for demerit

goods:

Alcoholic

beverages,

drug use

etc.)

Divisible Induvidual

consumptio

n.

Excludable

Merit goods

spread

external

economies.

Demerit

goods

spread

external dis-

economies.

May occur There may

be rent

seeking

eftorts.

Individuals

also may

fight to

obtain a free

lunch

Forced

rider.

Elementary

education

may be

compulsory

ALTERNATIVE DELIVERY

METHODS OF PUBLIC GOODS

Public goods can be provided via many arrangements. First, govenment itself can provide all type of goods and services. However, markets fail to provide pure public and common pool goods. Markets are unable to supply a pure public good-say, national defense or judiciary-due to their characteristics of indivisibility and non-exclusion.

Market also fails to supply common pool goods now that their consumption is free as long as individuals can spend effort to obtain them.

The reason why this type of goods can not be provided by marketplace is that exclusion mechanism can be hardly implemented or sometimes it is too expensive to implement. As a result of this, free rider usually occurs for this type of goods and therefore market is not interested in production.

Key Terms with Alternative Delivery

Methods of Goods and Services Government production

Private pruduction

Joint venture

Contracting-out

Leasing

Franchising

Grant system

Voucher system

User charges

Voluntary organizations

Build-operate-own

Build-operate-transfer

Although a pure public good can only be provided by

public, a pure private good can be delivered via

numerous arrangements.

First, government itself can produce this type of goods

by establishing public economic enterprises.

Secondly, government can make a contract agreement

with a private firm to supply some private goods and

services.

Third, government can transfer the management of a

specific public service to a private firm (management

contract) or transfer both management and operation

(leasing).

ALTERNATIVE DELIVERY METHODS OF PUBLIC GOODS

Pure Pure Toll Common Merit/ Demerit

Private Public Goods Pool Goods

Goods Goods Goods

1. Market (+) (-) (+-) (+-) (+-)

2. Government (-) (G) (+-) (+-) (+-)

3.Contracting Out (+-) (+-) (+-) (+-)

4.Franchising (+-) (+-) (+) (+-)

5.Leasing (+-) (+-) (+-) (+-)

6.Management Contract (J) (+-) (+-)

7.Joint venture (+)

8.User Charges (+)

9.Grant (+-) (+)

10.Voucher (+) (+)

11.Voluntary Organizations (+)

12.Build-Operate-Transfer System (+-) (+-) Notes: (+) The most successful arrangement.

(+-) Market arrangement is considered more succesful than govemment. However, limited government regulation and control may be required.

(-) The arrangement is not successful.

(G) Government is the only producer, although the government arrangement is not successful.ü

(J) Arrangement is successful, but government interference should be minimal and management and operation should be performed by the private firm.

Delivery Methods of Public Goods