Prices for Individual Consumption, Quantity Indicators for Collective Consumption

Abstract

In the classical situation discussed by microeconomic theory, commodities are consumed individually either by firms or by households. Prices are then considered as the main vehicle of information for a proper allocation of resources. The public good problem has turned our attention towards the case in which some commodities are consumed collectively. Following P. A. Samuelson,3 economists have realized that, for the provision of public goods, the price system cannot work in the same way as it is supposed to operate for the distribution of private goods. The distinction between the two types of consumption is clearly apparent if we consider how information on individual needs and wants is actually conveyed within the social process ruling the allocation of resources. On the one hand for private consumption, households and firms usually express demands at more or less given prices, these demands being directly addressed to the various markets. On the other hand when the budget of a public body is being discussed, the individual agents or their representatives must exhibit in some way their priorities among projects. Faced with a proposed programme for the institution, they must suggest whichever changes they would favour: more for schools and less for highways, or more for both at the cost of higher taxes ... and so on. By such proposals individuals or their representatives tend to reveal their marginal rates of substitution with respect to the budget under discussion. Hence, households and firms manifest their wants by quantitative demands in the case of private consumption, by marginal rates of substitution in the case of collective consumption. In order to formalize this distinction, to understand it better and to study its implications we must obviously not limit ourselves to equilibrium analysis. With respect to an equilibrium programme, and its associated prices and taxation rates, the distinction practically vanishes: both for private and for public consumption individuals accept the prices and tax rates as measuring their marginal rates of substitution and do not demand any quantitative change. Our concern must be the process by which an equilibrium, or optimum 5, programme is or could be found. Our theoretical investigation may then proceed from either of two approaches. We may aim at being positive , i.e. at describing the actual social decision process. Or we may pretend to be normative, i.e. to find a,process with interesting properties. I shall here adopt the second approach, because it is fundamentally much simpler. But I shall look