Samuelson machines and the optimal public-private mix

Abstract

Standard economic analysis assumes the sets of public and private goods to be exogenously given. Yet societies very often choose the public-private mix, using resources to convert seemingly private goods into ones with public goods characteristics and vice versa. In practice, we see a bewilderingly large variety of public-private mixes across societies. This papers advances an analysis of the choice of the public-private mix in the framework of voluntary contributions to public goods provision, by envisaging that, starting from a situation where all goods have private characteristics, some goods can be changed to have public goods characteristics at a cost (by purchasing a Samuelson machine). It characterizes the jointly optimal choice of the public-private mix and the efficient supply or not of the public goods in the mix. This characterization generates a number of testable predictions on the public-private mix, and on the prevalence of free riding