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

Author

Listed:
  • 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.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang, 2011. "How Should A Public Good Be Provided? A Transaction Cost Approach," Division of Labor & Transaction Costs (DLTC), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 69-80.
  • Handle: RePEc:wsi:dltcxx:v:03:y:2011:i:02:n:s021987111100038x
    DOI: 10.1142/S021987111100038X
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    References listed on IDEAS

    as
    1. Francis M. Bator, 1958. "The Anatomy of Market Failure," The Quarterly Journal of Economics, Oxford University Press, vol. 72(3), pages 351-379.
    2. 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.
    3. Coase, R H, 1974. "The Lighthouse in Economics," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 357-376, October.
    4. Holcombe, Randall G., 2015. "A Theory of the Theory of Public Goods," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 196-207.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D - Microeconomics
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • F - International Economics
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L - Industrial Organization
    • O - Economic Development, Innovation, Technological Change, and Growth

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