PROLOGUE

RICHARD A. MUSGRAVE AND PEGGY B. MUSGRAVE

The distinction between public and private goods was first made in the late 18th century, when Adam Smith (1994 [1776] p. 779) noted the existence of certain products "which though they may be in the highest degree advantageous to a great society are, however, of such a nature that the profits could never repay the expenses to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect." Thus Smith, though an ardent advocate of the market, recognized that it does not solve all problems. Moreover, he concluded that because the market fails to provide public goods, government must do so.

Ever since, public goods have been an intriguing issue in economic theory. In addition, debates on what should be provided and who should pay have been central to the political economy of public finance. This is not surprising given that such debates involve issues related to distribution and the balance between states and markets.

Public goods create challenges because their benefits are not limited to a single consumer or group of consumers-as with private goods-but are available to all. Consumption of private goods is rival, while consumption of public goods (at least pure public goods) is nonrival. This distinction initially guided two types of analysis of public goods. First, conditions for their efficient provision were shown to differ from those for private goods. In the 1880s marginal utility theory asserted that provision of both public and private goods should equate costs and benefits at the margin.

But as Samuelson (1954) showed 70 years later, that relationship differs for the two types of goods. Efficient provision of private goods calls for their marginal rate of transformation in production to equal their marginal rate of substitution in consumption. But efficient provision of public goods calls for their marginal rate of transformation in production to equal the sum of their marginal rates of substitution in consumption. This distinction has been of primary interest to economic theorists-but it is only half the story.

Determining the efficient level of public goods requires knowing consumer preferences. That knowledge is often assumed as given in theoretical models of optimal provision, but obtaining it is a major challenge when it comes to actual policy. Thus a second distinction is made between public and private goods. To obtain the benefits of private goods, individual consumers must bid and pay for their share of them. These activities, in turn, tell the market what to supply and what consumers will pay-enabling the market to act as an efficient provider.

But with public goods benefits are nonrival: benefits available to an individual consumer are also available to all other members of the group. If many people are affected and exclusion from benefits is impractical (as with policies to improve air quality), individual consumers will not reveal their preferences and will not bid. Instead they will free ride, relying on others to pay. But market failures occur in the absence of consumer bidding. Thus an alternative mechanism, involving public budgets and taxes, is needed to pay for and provide such goods. Wicksell (1882) was the first to focus on this failure of preference revelation, suggesting that it could be overcome in democratic societies, where voters can support politicians whose tax and spending policies meet their wishes. With mandatory acceptance of political outcomes, consumers have an incentive to reveal their preferences, suggesting an efficient provision of public goods. Securing preference revelation through the political process opens a sec

While the core of the public goods problem rests with nonrival consumption and nonexcludable benefits, in practice goods may have aspects of both privateness and publicness. Exclusion may be possible-for example, by charging a toll to cross a bridge. But the charge will be inefficient if the bridge is underused, because in that case the bridge's benefits are nonrival. Charging becomes efficient only when a facility is crowded, because entry of additional users reduces each user's benefits. Where crowding occurs, user clubs may serve as a market-like mechanism to secure efficient provision without requiring the state to step in. The potential for such "club goods" (Buchanan 1965) has been of major interest in local finance, as shown by the widely used example of swimming pools. But it appears to be of limited significance in the global context.

Nonrival availability of benefits to all members of the benefiting group is the essential characteristic of public goods, but the group has to be defined. Groups can be defined along various dimensions. Public concerts provide benefits to people who like music but are of no value to the deaf. Many groups can be considered. But among them the area over which benefits extend is of particular concern to this volume, with its linkage of public and global in the role of global public goods.

The benefits from some public goods-such as legal institutions, defense systems, and nationwide highways-extend over the entire nation-state in which they are provided. The benefits from others, such as local roads or traffic lights, cover a limited area. Using a voting process to reveal preferences implies that public goods should be chosen and paid for by those who benefit from them. This suggests that goods with a narrow range of benefits be voted on and paid for locally, those with a nationwide range of benefits be provided centrally, and those with a global range of benefits be provided globally.

Because benefiting regions may not coincide with political boundaries, arranging for the provision of public goods may require determining and designing jurisdictional boundaries.Moreover, the benefits of public goods provided by one state may spill over into others.As a result provision becomes an international and, with unlimited benefit space, global issue. Truly global public goods stand at the end of a chain stretching from local street cleaning to national defense and environmental protection to global warming. The more global is the region over which benefits extend, the greater is the need for global policy instruments.

The discussion so far has addressed the nonrival nature of the benefits and provision of public goods. A parallel problem exists in the prevention of public bads. Externalities generated by country A's production or consumption may be harmful to countries B and C.Again,because the market does not restrain the generation of external costs, a public policy instrument-fiscal or regulatory-is needed to account for them. Thus the points made about the provision of public goods, including the role of spatial incidence, also apply to the reduction of public bads.Reducing the social bad of pollution supports the social good of clean air, and the cost of cleaner air may be reflected in a higher cost of driving polluting vehicles. Externalities can be harmful as well as beneficial, and corrective policies are needed in either case.

As suggested by this brief prologue and as clearly shown by the far-reaching analyses in this volume, moving public goods and bads to the global level poses many challenges. Their provision also raises some broader concerns, including the role of global public goods in equitable global distribution. When provision of public goods (or prevention of bads) is handled through interjurisdictional agreements, the relatively small number of actors means that agreements can generally be reached through bargaining. As the Coase theorem (1960) shows, such agreements might yield efficient outcomes whether country A is entitled to pollute and disturb B or whether country B is entitled not to be disturbed by A. But who benefits and who is harmed will differ according to how entitlements are assigned. If A is entitled to pollute, B must pay A to desist. But if B is entitled to protection, A must pay to disturb B. Both outcomes may be efficient, but the transaction does not resolve the need for an equitable result. For this, entitlements must be chosen.

More generally, the equitable provision of global public goods can be viewed as part of the challenge of achieving global equity-an all-encompassing public good. Thus provision of some goods and prevention of some bads must take into account equity considerations. But problems arise depending on the public good or bad in question.Reducing an activity with harmful externalities may be cheaper in a low-income country than in a high-income country,posing a conflict between efficiency and equity considerations. Compensating transfers can be used to resolve this conflict-including, if there is political will to provide them, transfers that can be used to acquire private goods. For many social goods, however, concern with global equity is not an issue.

The United Nations Development Programme and its Office of Development Studies are to be congratulated for having placed these vital issues at the center of their research. No sponsors are better suited to carry out this work. This volume extends the analysis and findings of its precursor (Kaul, Grunberg, and Stern 1999),with an emphasis on crucial issues of implementation. It broadens the concept of public goods in their many forms, examines the political process and instruments needed to deal with them efficiently and equitably, and provides an insightful set of case studies. As with its predecessor, no one concerned with the role of public goods in the global setting should miss this book.

REFERENCES
Buchanan, James. 1965. "An Economic Theory of Clubs." Economica 32 (125): 1-14.
Coase, Ronald. 1960. "The Problem of Social Cost." Journal of Law and Economics 3 (1): 1-44.
Kaul, Inge, Isabelle Grunberg, and Marc A. Stern, eds. 1999. Global Public Goods: International Cooperation in the 21st Century. New York: Oxford University Press.
Samuelson, Paul A. 1954. "The Pure Theory of Public Expenditure." Review of Economics and Statistics 36 (4): 387-89.
Smith, Adam. 1994 [1776]. The Wealth of Nations: An Inquiry into the Nature and Causes. New York, NY: Modern Library.
Wicksell, Knut. 1958 [1894]. "A New Principle of Just Taxation." In Richard A.
Musgrave and Alan Peacock, eds., Classics in the Theory of Public Finance. London: Macmillan.

Click here to go back to Table of Contents