On the Privatization of Excludable Public Goods

Abstract

There is a growing interest among state and local government officials in the possibility of privatization of the provision of public goods. In the face of increasing opposition to tax increases and government growth, the transfer of responsibility for the delivery and pricing of services from the public sector to the private sector becomes an attractive option. Assessment of the impact of the transfer from public to private institutional arrangements upon provision of public goods requires that properties of the private and public equilibria be established. In a series of provocative papers the possibility of private market provision of public goods has been explored. Building upon early contributions by Thompson [10] and Demsetz [5], both competitive [7] and monopoly [3; 2; 4] models have been developed in an attempt to characterize private market solutions to the public goods allocation problem under conditions of costless exclusion. A common conclusion of these recent papers is that private provision of excludable public goods is inefficient. The private pricing mechanism results in underallocation of resources to the production of public goods capacity and in the underutilization of the capacity which is produced. The implication is that, relative to the first-best Lindahl-type public equilibrium, the private equilibrium represents an inferior alternative. Although the Lindahl solution provides an appropriate benchmark for pure theoretical inquiry, the actual process of privatization develops from a majority voting status quo in the public sector. In this paper we wish to extend the scope of comparative analysis to the case of private market versus majority voting public sector provision of excludable public goods. The concept of public sector equilibrium employed is that of median voter equilibrium. This concept has become a standard within the theoretical public goods literature [1] and has enjoyed some recent empirical support as well [6]. The particular research issue we will address is the identification of conditions under which a majority of the consumer/voters would prefer the private monopoly outcome to the public monopoly outcome. Given the increasing interest in the privatization of public service delivery, the framework of analysis contained in this paper would seem to be of significant potential public policy import. A nonexhaustive list of potential candidate services for monopoly privatization would include roads, waterways, parks, museums, zoos, and airports. We employ consumer surplus analysis to determine the percentage of voters who prefer the private monopoly solution to the public outcome. Successful privatization requires majority support from an interesting coalition of low and high demanders of the public good. Low demanders