A an underprovision of the good from the

A fundamental principle of the welfare state is effective
provision of public goods, maximising this delivery of public goods is an
essential component in efforts made to raise the quality of life enjoyed by the
various members of the welfare state. Thus, governments have held many policy discussions
debating the optimum methods in which a public good can be delivered. The rise
of neo-liberal economics in the 1980s saw an increased involvement of private
agencies with the delivery of public goods, hence there was a shift in the
division of responsibility between the public and private sectors.

 

Economists commonly use dichotomous
distinctions to define private and public goods, whereby public goods are said
to be non-rivalrous in consumption and non-excludable from those who did not
contribute, and in contrast, private goods are both rivalrous and excludable.
However, in reality, contextual considerations are important for
differentiating between public and private goods, as the defining
characteristics of rivalry and excludability, can vary in degree. This suggests
that there is a public-private goods continuum that categorises goods into four
main classes with the continuum’s ends being defined as ‘pure’ public goods and
‘pure’ private goods respectively; the remaining two categories are club goods
and toll goods (Adams and McCormick, 1987). National Defence is a good example
of a pure public good as a consequence of defending just one citizen from
foreign attack, is that the rest of the population is also defended. Thus,
difficulties arise in charging people for defence, making the provision of this
good, susceptible to the ‘free-rider problem’ – a phenomenon that occurs when
enough people are able to enjoy a good without having to pay for its provision,
resulting in an underprovision of the good from the free market. Hence, it is
generally accepted by economists, that the state is the only appropriate
platform to sufficiently deliver ‘pure public’ goods, paid for using a taxation
system (Cowen, 2008). Club goods are non-rivalrous, but excludable like private
goods, though typically shared by more people; a ‘membership’ fee is often
required in order enjoy the benefits of the club goods (Buchanan, 1965). Toll
goods are non-excludable like public goods, but rivalrous giving rise to a
problem known as ‘the tragedy of the commons’; usage depletes the quantity
available to others, thus toll goods tend to be over-consumed. Both cub and
toll goods are considered to be part of the broader category of public goods,
despite having an attribute associated with the private end of the spectrum.
Thus, the two classifications need to be taken into account when discussing the
potential provision of public goods as in principle they could be privately
delivered. The rise of neo-liberal economics has led to an increased
involvement of the private sector in the deliverance of public goods, via the use
of the market mechanism. However, microeconomic theory suggests the market is
an inefficient platform for the allocation of goods as it fails to consider the
possible externalities associated with the provision of a particular public
good thus resulting in market failure (supply and demand are out of
equilibrium) (Ghatak, 2005). Market failure is the most significant rationale
for government intervention, however, there are downsides to state provision
that justify the use of private delivery where appropriate. For instance, when
the government is solely responsible for the provision of goods and services,
there is a lack of market forces such as the price mechanism which can result
in the misallocation of resources thus the state is unable to efficiently provide
the public goods. Furthermore, there is an opportunity cost in government
transactions for the provision of public services, meaning that in order to
supply a particular good, another service must be forgone as there is less
money available (Cole and McGinnis, 2015). The use of private delivery
mechanisms such as free markets can counteract the issues faced by state
delivery. Furthermore, evidence suggests that free markets can reduce the costs
and inefficiencies associated with the state’s bureaucratic administration. The
absence of red-tape means that the private sector does not have to wait for
governmental instructions, it is free to study consumer demands in order to
meet the demands of the equilibrium. Additionally, the introduction of competition
encourages innovations that improve the quality of service, at the most
cost-effective price (Hsu, 2010). Market systems can be utilised by the
government for the provision of public goods by using contracts and forming
public-private partnerships that establish and maintain property rights and
additionally identify the common platform for the deliverance of goods and
services. Different private agencies are invited to compete for these
government contracts, and this competition incentivises the organisations to
provide the best quality service for the best value for money. Government
policy programmes may choose to subsidise these contracts, in order to reduce
the price of the goods, so that greater consumption is encouraged, meaning that
a greater proportion of the population can benefit from the private provision
of the particular public good.

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The graph in Figure. 1 shows the
effects of a unit subsidy on a supply-demand graph, here the graph shows how
the subsidy reduces the cost per unit (P1 to P2), whilst simultaneously
increasing the product’s output (Q1 to Q2). The effects of the subsidy are
dependent on the elasticity of demand. Subsidising is an interesting policy
debate, as there are potential problems such as accurately measuring the extent
of the externalities that the subsidy is accounting for, furthermore, firms are
able to make larger capital gains when subsidised (Schwartz and Clements, 1999).
However, subsidies can be utilised to promote specific economic or social
policies, for instance, subsidising public transport means that a greater
number of low-income houses will be able to afford to use public transport,
thus reducing carbon emissions from cars as a greater proportion of the
population may choose to utilise public transport. Another way in which the
government can utilise contracts for the private delivery of public goods is by
establishing a minimum standard of conduct that must be upheld in order to
comply with licensing agreements, the consumer is then invited to select which
supplier they would like to purchase the service from (Ostrom and Ostrom,
1999). For example, Transport for London (TfL) is responsible for licensing
taxi services in London, taxi firms are only eligible to provide a service if
they conform to the regulations established by TfL.

 

Public transport is an interesting
policy example to focus on when assessing the argument that public goods can be
privately delivered. The development of transport infrastructure offers a
valuable insight into how private agencies are being used in an effort to
deliver a more accessible, reliable and efficient service to the public.
Notably, paying close attention to the development of the UK railway service
helps to form an understanding of the policy implications of utilising private
deliverance for public goods. Wang and Baddeley compare four different policy
models of transport infrastructure development in their paper; two of which are
centred on the different methods in which private funding has been used for the
provision of a public good. They take a Coasian approach to the analysis of
positive externalities’ impact on the development of infrastructure. The first
model, ‘The Metroland Model’, is archetypical of infrastructure development in
nineteenth-century England, it illustrates how private developers were able to
provide the public good of the Metropolitan Railway and how capital was
privately raised to pay for it. A private firm named the Metropolitan Railway
company was commissioned by the government to develop the land in the
metropolitan area and construct a railway. The private agency was able to raise
capital to fund this infrastructure development by building, and selling
residential properties on the surplus land surrounding the completed railway.
The second model, identified as ‘The Special District Model’ has similar
properties to the first model, but in this case, the responsibility for
development is delegated to individual households rather than a private firm.
In essence, this model conceptualises transport infrastructure as a club good.
This model is depicted as central to the up keeping of the American interstate
freeway infrastructure, where property value rises with increasing
accessibility to the interstate; property tax is then charged accordingly (Wang
and Baddeley, 2016).

 

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