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How Should A Public Good Be Provided? A Transaction Cost Approach

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  • WENLI CHENG

    ()
    (Hunan University of Science and Technology, China; Department of Economics, Monash University, Australia)

  • DINGSHENG ZHANG

    (China Economics and Management Academy, Central University of Finance and Economics, China; Institute for Advanced Study, Wuhan University, China)

Abstract

This paper applies Coase's (1937) theory of the firm to study public good provision. It compares three methods of public good provision: (1) collective provision, where users organize themselves to jointly finance the public good which is produced by a specialized firm; (2) market provision without outsourcing, where a firm produces the public good and a private good, and sells them as a bundle; (3) market provision with outsourcing, where a firm produces a private good, outsources the public good, and sell them as a bundle. All three methods of public goods provision deal with the problem of non-excludability, but each is associated with different transaction costs, organization costs, and specialization economies. The best method is the one which achieves the optimum tradeoffs among transaction costs, organization costs, and specialization economies.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Division of Labor & Transaction Costs.

Volume (Year): 03 (2011)
Issue (Month): 02 ()
Pages: 69-80

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Handle: RePEc:wsi:dltcxx:v:03:y:2011:i:02:p:69-80

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Keywords: Public good; transaction costs; organization costs; specialization economies;

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  1. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier.
  2. Holcombe, Randall G, 1997. " A Theory of the Theory of Public Goods," The Review of Austrian Economics, Springer, vol. 10(1), pages 1-22.
  3. Coase, R H, 1974. "The Lighthouse in Economics," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 357-76, October.
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