A note on the valuation of collective goods: overlooked input market free riding for non-individually incrementable goods
AbstractFor at least fifty years economists have argued that vertically-aggregated marginal willingness to pay, when set equal to marginal provision cost, will result in optimal public good provision levels. This methodological approach would be expected to yield an exact analog, in terms of optimal levels of public good provision, to efficient provision of private goods in a perfect market setting. There is, however, a potentially serious flaw in the approach as actually practiced, since initial incomes are implicitly–and wrongly–taken to be optimal. From a given income, the output demand revelation problem has long been recognized–that there will be difficulty inferring true demands for public goods at that income (the traditional ‘free rider’ problem). But what has failed to receive widespread recognition among theoreticians, and especially among practitioners, is that there will also be a concomitant ‘input demand revelation’ problem. In any situation where workers cannot individually increment a class of goods by increasing their income (e.g. public goods), they will have no incentive to generate the income that would have been devoted to that class of goods. They will only generate income that is optimal to pay the higher taxes or prices associated with whatever initial public goods levels are provided. As a consequence, the benefit-cost practitioner will, even if somehow able to accurately guess marginal willingness-to-pay out of current income, observe only one apparent optima. There are an infinite number of such optima, one for each level of free riding in input markets, where aggregated marginal willingness-to-pay will appear to equal marginal provision cost. The one true Samuelson ‘optimum optimorum’ occurs when there is free riding in neither output nor input markets (that is, when the ‘full’ demand revelation problem is solved). As a consequence, pure public goods, as well as other ‘non-incrementable’ goods and goods for which non-use values are of importance will be undervalued, hence under-provided. Evidence is presented that the problem raised here might be of importance, undermining the practical significance of the Coase theorem vis-a-vis Pigouvian taxation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 19928.
Date of creation: 2009
Date of revision:
environmental economics; willingness-to-pay; willingness-to-accept; benefit-cost analysis; public goods; publicly-provided goods; efficiency;
Other versions of this item:
- Graves Philip E, 2009. "A Note on the Valuation of Collective Goods: Overlooked Input Market Free Riding for Non-Individually Incrementable Goods," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-20, February.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- H0 - Public Economics - - General
- A1 - General Economics and Teaching - - General Economics
- Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
- A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
- H4 - Public Economics - - Publicly Provided Goods
- H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
- Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- N5 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-23 (All new papers)
- NEP-ENV-2010-01-23 (Environmental Economics)
- NEP-PBE-2010-01-23 (Public Economics)
- NEP-PUB-2010-01-23 (Public Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nicholas E. Flores & Philip E. Graves, 2008.
"Optimal Public Goods Provision: Implications of Endogenizing the Labor/Leisure Choice,"
University of Wisconsin Press, vol. 84(4), pages 701-707.
- Flores, Nicholas E. & Graves, Philip E., 2008. "Optimal public goods provision: implications of endogenizing the labor/leisure choice," MPRA Paper 19923, University Library of Munich, Germany.
- Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-47, June.
- Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
- Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
- Groves, Theodore & Ledyard, John O, 1977.
"Optimal Allocation of Public Goods: A Solution to the "Free Rider" Problem,"
Econometric Society, vol. 45(4), pages 783-809, May.
- Theodore Groves & John Ledyard, 1976. "Optimal Allocation of Public Goods: A Solution to the 'Free Rider Problem'," Discussion Papers 144, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Charles R. Plott & Kathryn Zeiler, 2007. "Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?," American Economic Review, American Economic Association, vol. 97(4), pages 1449-1466, September.
- A. Myrick Freeman III, 2002. "Environmental Policy Since Earth Day I: What Have We Gained?," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 125-146, Winter.
- Philip E. Graves, 2010. "A Note on the Design of Experiments Involving Public Goods," CESifo Working Paper Series 3187, CESifo Group Munich.
- Philip E. Graves, 2011.
"Appropriate Fiscal Policy over the Business Cycle: Proper Stimulus Policies Can Work,"
The IUP Journal of Governance and Public Policy,
IUP Publications, vol. 0(2), pages 26-32, June.
- Philip E. Graves, 2010. "Appropriate Fiscal Policy over the Business Cycle: Proper Stimulus Policies Can Work," CESifo Working Paper Series 3160, CESifo Group Munich.
- Philip E. Graves, 2010. "Benefit-Cost Analysis of Environmental Projects: A Plethora of Systematic Biases," CESifo Working Paper Series 3144, CESifo Group Munich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.