A Comment on the Pure Theory of Public Expenditure

Abstract

IN a recent article in this REVIEW,' Professor Samuelson proves anew assertion that 'no decentralized pricing system can serve to determine optimally levels of collective (page 388). It is possible, he further states, that utopian voting and signalling schemes can be imagined. But there is still this fundamental technical difference going to heart of whole problem of social economy: by departing from his indoctrinated rules, any one person can hope to snatch some selfish benefit in a way not possible under self-policing competitive pricing of private goods; and 'external economies' or 'jointness of demand' intrinsic to very concept of collective goods and governmental activities makes it impossible for grand ensemble of optimizing equations to have that special pattern of zeros makes laissezfaire competition even theoretically possible as an analogue computer (page 389). conclusions and reasoning are familiar but never as cogently put. Samuelson divides budget into two sectors. first sector presents no difficulties to him. It consists of algebraic taxes and transfers (of an income redistribution type) would have to be varied until society is swung to ethical observer's optimum (page 388). It is in second sector, provision of collective goods, that difficulties arise. contention of this note is that a decentralized pricing system for all public services is technically difficult for reasons other than those stated by Samuelson; but more important is contention that his approach to a theory of public is unfruitful. heart of Samuelson's argument against a decentralized pricing system is definition of collective goods. They are goods which all enjoy in common in sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good . (page 387). It follows from this that if both A and B desire an additional unit of a 6ollective good, it would be advantageous to both that other person pay, since each will receive full benefits of good no matter who pays. good, because of its technological characteristics, cannot become private property. Since Samuelson claims that he is analyzing the theory of optimal public expenditures we must assume that he is asserting that there are public on services if and only if these services are collective consumption goods. A more sympathetic reading of note might suggest that author was only discussing possibility of sole reliance on benefits taxation as a pricing mechanism for public services and was not explaining their genesis, or that he was even more modest and was suggesting technical difficulties of benefits taxation in case of a restricted set of public expenditures. Are there collective consumption goods? Are they typical public services? In defense of Samuelson there are a host of theorists who have begun their arguments same way. Against Samuelson are facts. He claims that collective goods are not rationed that use of a good by A does not involve any costs to B. Clearly this is not case in such common public services as education, hospitals, and highways, where capacity limitations and congestion are topics of daily press. Would it be true of more sovereign functions of justice and police? crowded calendar of courts certainly implies that use of this function by A makes it less available to B. Similarly a complaint to police ties up officers in a maze of arguments, forms to be completed, and hearings to be attended, reducing their availability to others. Possibly only goods * I am indebted to K. J. Arrow and R. A. Musgrave for helpful discussions on this note. This paper was prepared with support of Office of Naval Research under contract N6onr-2 5I33 (NR-o47-oo4). 1 Paul A. Samuelson, The Pure Theory of Public Expenditure, this REVIEW, XXXVI (November I954).