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

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  • Wenli Cheng
  • Dingsheng Zhang

Abstract

This paper investigates how the trade-off between organization costs, transaction costs and economies of specialization may affect the way public goods are provided. In doing so, it considers two ways of providing a public good. One is collective provision where users organize themselves to jointly finance the public good which is produced by a specialized firm. The other is market provision with bundling where a firm produces the public good and a private good and sells them as a bundle. Both methods of public goods provision deal with the problem of non-excludability. The first method involves organization costs, but can take advantage of specialization economies; the second method avoids organization costs, but may incur some transaction costs and forgoes the benefit of specialization economies. Which method is superior depends on the relative magnitudes of organization costs, transaction costs, specialization economies as well as other features of the economy such as population size.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang, 2006. "How Should A Public Good Be Provided? A Transaction Cost Approach," Monash Economics Working Papers 09/06, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2006-09
    as

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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2006/0906publicgood.pdf
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    References listed on IDEAS

    as
    1. Coase, R H, 1974. "The Lighthouse in Economics," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 357-376, October.
    2. Holcombe, Randall G, 1997. "A Theory of the Theory of Public Goods," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 10(1), pages 1-22.
    3. 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.
    4. Francis M. Bator, 1958. "The Anatomy of Market Failure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 72(3), pages 351-379.
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    More about this item

    Keywords

    public good; transaction costs; organisation costs; specialisation economies .;
    All these keywords.

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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