Services which have both characteristics of a public good.
Police services
The police are employed in a number of capacities but let us concentrate on crime prevention. The presence of a police force is sufficient to prevent some measure of crime from taking place but the benefits are indivisible. The degree of prevention of crime is independent of the number of potential beneficiaries, at least up to some (indefinable) number of such beneficiaries. There is no way in which the police service can be denied to those who are not prepared to pay. (Note that once the size of the police force is determined by the allocation of funds met from taxation, it does not follow that everyone will be satisfied with the level of provision. Those who consider that they are not sufficiently protected from being robbed do have the possibility of increasing protection by investing in burglar alarms. Note that societies normally restrict the right of citizens to carry weapons or to employ armed bodyguards. Why?)
Fire prevention and defence services
You should be able to apply the same argument to these services. Note also circumstances in which individuals may have an incentive to supplement provision financed by compulsory levies, and the circumstances in which society may wish to prevent individuals from supplementing ‘public’ provision.
Lighthouses
These are usually quoted as the ‘public good’ par excellence. The beam from a lighthouse serves as a navigational aid, such that the marginal cost of providing it to ships is zero. At the same time, the use of the navigational aid cannot be denied to those who are not prepared to pay. (Note, however, that the interest of the user of lighthouse services lies in its effectiveness as a navigational aid. With technical advances, it is now possible to use radio and electronic devices which are effective alternatives to the visual aid of a lighthouse beam. Moreover, the services of these devices can be denied to those not prepared to pay. A parallel example is found in broadcasting. Encrypting devices have been developed which make it possible to prevent viewers from watching television programmes without paying. Whether those demanding navigational aids or television programmes will prefer to pay directly or be taxed in order to provide the relevant services is a separate, though important, issue.)
Services which have one characteristic of a public good.
National parks and motorways
These are examples of goods whose benefits can be denied to non-payers, but which, over a considerable range of ‘output’, are ‘non-rival’. A charge can be made for entry into a national park, but an extra person enjoying the scenery does not deny the service to those already enjoying it. Similarly, entry to a motorway can be made dependent on a toll, but an extra vehicle does not deny the service of the motorway to existing users, at least up to the point where congestion clogs up the lanes.
Services embodying neither characteristic of a public good.
Before considering the remaining cases, it must be stated that the question concerns ‘pure’ public goods. That being the case, free elementary education, waste collection and public housing are not pure public goods. Those not prepared to pay for education, housing, or waste collection can be denied the services, and the availability of each service to a pupil, household or renter denies its use to another. However, it is often claimed that all these services contain an element of publicness, in the sense that benefits may accrue to persons other than the direct beneficiaries. Education of children may benefit the rest of the population through reduction in lawlessness. Waste collection may reduce the incidence of disease and offensive smells suffered by persons other than those accumulating waste. The health of a community at large may depend on the amount and standard of housing. However, if such services were provided only to those willing to pay for them, there would be no guarantee that the level of provision of the service would enable the community at large to realize these ‘extra’ benefits in the amounts which the community perceives as desirable.
The conclusion must be that the economist's theory of public goods only offers a partial explanation for the amount and composition of services provided by government. Moreover, it does not carry the implication that the service which would not otherwise be provided by the market alone need be produced, as distinct from being financed by the government. For example, housing standards necessary to provide the ‘external benefits’ identified in the last paragraph might be reached by subsidizing individuals through housing vouchers exchangeable for private rented accommodation. Other explanations must be sought for public provision. For example, if the community wishes to equalize access to certain services, such as education, it could be that public provision of the services free would be the most efficient way of ensuring that the principle of equal access was being applied.
This is a very simple calculation, e.g. for item 1 the calculation is 150/100 × 100% = 50%
Similarly for the other items:
2. 100%; 3. 40%; 4. 0%; 5. −50%; 6. 54% (app.); 7. 4% (app.); 8. 1% (app.)
Measure 1 is:
calculated for 1975 and 1995:
Measure 2 is:
which yields the result (check it for yourself):
Measure 3 is:
which yields the result (check it for yourself):
The obvious comment is that different measures of the relative growth in the size of the public sector may not only produce different results, but even the trend may be different (cf. Measures 1 and 2 with Measure 3).
Tax Freedom Day
The concept of ‘tax freedom’ contains a value judgement of considerable importance which, according to whether one accepts that judgement or not, determines the perceived relevance of the concept. The judgement is that taxes confer on taxpayers only burdens and no benefits. Put another way, ‘freedom’ of the taxpayer would be implicitly maximized if he/she paid no taxes whatsoever. However, if the ‘price’ of not paying taxes is that there would be no expenditure on defence and law and order, income receivers might very well consider that this is equivocating with the use of the word ‘freedom’. Of course, an individual income receiver may prefer a situation where he/she pays no taxes but receives benefits which others are taxed to provide, but this does not represent the average taxpayer position which is the subject of the calculation.
Even if the value judgement implicit in the concept were widely accepted, the incidence of ‘tax freedom day’ could be very different for different income groups with differing average tax burdens. Of course, if all incomes were very close to the average, i.e. incomes were roughly equal, and all income receivers had identical preferences for taxed goods and services, and paid roughly the same amount of income and social security taxes, then they would be ‘free’ of taxes roughly at the same time. This is an unlikely circumstance. Furthermore, note that the pre-tax level and distribution of income is not independent of the public budget. A reduction in the wages and salaries bill or in the social security transfer bill of the government, reduces both the pre-tax incomes of the community and the total taxes paid.
A further logical difficulty arises about what to do about financing of government services, in part, by the issue of debt. Should the incurring of debt, which must be paid back out of future taxes, be regarded as part of the present tax burden? Similarly, what should be done about charges by government, e.g. road tolls, for services rendered and which can be avoided by not using the services provided? Presumably, such charges should be ignored, as being similar to prices paid for private goods and services. But what about compulsory payment of school fees or water charges?
Finally, there is the vexed question of tax shifting. In the end, all taxes must be borne by individuals, either as consumers or as income receivers, so the problem may be avoided if we assume a closed economy with no overseas economic transactions. However, if the economy is open, then there is the possibility that taxes on exported goods can be passed forward to overseas buyers, whereas the domestic consumers may have taxes levied in overseas countries on its exports shifted on to them. In the Canadian calculation, this was quite important because calculations for tax freedom day are made for each individual state, and cross-border trade between states is extensive.
(a) and (c)
The important preliminary point to be made is that, in each case, the change in the independent variable presupposes no change in other independent variables. (In mathematical terms, we are interested in the partial derivative of Gp with respect to each variable.) Now consider each independent variable in turn.
It seems reasonable to postulate that the sign is (+), though this is not to say that the rise in Gp is proportionate to the rise in GDPp. If population is given, then what we are really comparing is a change in G with a change in GDP. A rise in living standards resulting from a rise in GDP, with population constant, would probably be associated with a demand for a rise in standards of provision of government services and, arguably, with a demand for an increase in real incomes of transfer receivers. Note that, historically (Table 2.7, p. 2/11), the relation between GDP and G has not only been positive but the elasticity has been > 1.
This is not so easy, but a good case could be made for a minus sign (−). If population (p) rises, then government expenditure seems likely to rise, but not Gp. This is because of the operation of a ‘scale effect’ i.e. the marginal cost of the extra output resulting from population growth seems likely to fall. Some writers would want to qualify this hypothesis, by pointing out that Gp might be more sensitive to changes in the age distribution of p, because at the lower end of the age range, costs are higher than average (maternity hospitals, schools, etc.).
It would be safest in this case to put a (?). It is not certain whether, if publicly provided goods cost relatively more, that the political decision-making process would produce a rise in Gp. That would depend on the preferences at the margin for publicly provided goods compared with privately produced goods.
(b) and (c)
There are many further factors that could be introduced into the discussion of the influences on Gp, as Module 2 indicates, and the following examples are illustrative but far from exhaustive. (For the student who is interested in both the identification of independent variables and the problem of testing hypotheses, see Lybeck, J. A. and Henrekson, M. (eds) (1988) Explaining the Growth of Government, North Holland: Amsterdam..)
Proportion of working population employed by government
It might be argued that the hypothesis worth testing requires a (+) sign denoting that the growth in public employment produces a ‘self-propelling effect’ because public employees become a strong interest group with growing voting power.
Size of the government deficit
A lot of recent discussion has been concentrated on the build up of government deficits as a way of ‘hiding’ the cost of government to voters who become less resistant to increases in government expenditure growth. Clearly a (+) sign is implied.
Centralization of power as measured by the proportion of taxes and expenditure undertaken by central government
The argument here has cut both ways. Some writers have argued that central government taxation cannot be so easily influenced by voters as local taxation and that this reduces tax resistance. Others have argued that less centralization and several layers of government make it more difficult for economies of scale to be achieved and more difficult to control government expenditure growth. So perhaps a (?) is appropriate. It is worth noting that several statistical studies point out that federal countries tend to have a smaller size of government (using our measures) than countries with centralized systems of public finance. Sceptics argue that it so happens that such countries, e.g. Canada, the USA, and Germany have or had voters with ‘conservative’ preferences during the time period under examination.
