A Neglected Issue in Public-Goods Theory: The Monopsony Problem

Abstract

The recent literature has contained considerable discussion of conditions under which socially optimal levels[1] of public-goods consumption will be achieved through consumer cooperation.[2] However, analyses in this field have neglected one important problem: the potential monopsony situation which arises when consumers cooperate to articulate demand. In several instances neglect of this problem by examination of only constant-cost situations has led to erroneous conclusions. Sharp and Escarraz (1964) conclude that voluntary bargaining among consumers will lead to the optimal output, when they have in fact considered only the special case of perfectly elastic supply. In The Theory of Public Finance (1959) Musgrave also examines only constant-cost situations while stating that figures ... may be adapted to conditions of increasing cost without changing the principle of our argument (p. 76, n. 2). More recently, Buchanan, in The Demand and Supply of Public Goods (1968), makes the constant-cost assumption and consequently arrives at an erroneous conclusion when he states: At equilibrium, the marginal rates of substitution between the public good and the numeraire private good, summed over all persons in the group, must equal the marginal cost of supplying the public good, again expressed in units of the numeraire. This statement of the necessary marginal conditions for equilibrium in a world that contains a public good is fully general, and holds without qualification (p. 43). In this analysis we outline the equilibrium outputs of public goods which result from consumer cooperation under conditions of both constant and increasing costs and discuss some of their implications. [Авторский текст]