Public Expenditure Decisions in the Urban Community

Howard G. Schaller

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317310983
• Edition: 1
• Topic: Economía
• Subtopic: Economía medioambiental

In 1962, the Committee on Urban Economics held a conference on public expenditure decisions in order to promote analysis of the issues facing the public sector of the urban economy. Originally published in 1965, this report pulls together key papers presented at this conference discussing issues such as urban services, the patterns of public expenditure and the quality of government services in urban areas to draw conclusions on the difficulties of analysis and how economic tools could be utilised more effectively to solve these difficulties. This title will be of interest to students of environmental studies and economics.

1
Urban Services: Interactions of Public and Private Decisions

by William J. Baumol

As we grope toward more satisfactory criteria for urban public service decision making it is essential to keep in mind the relationship between the operations of the public and the private sectors. Indeed, our political philosophy leads us to consider the government to be, in some ultimate sense, a means whereby the members of the community can have their needs and wants satisfied more effectively. That is, public outlays are only justifiable in terms of their effects on private decisions and activities and, thus, on the welfare of the public in general. Looked at the other way, this means that only changes in the private arrangements can render appropriate types of urban governmental services which were formerly uncalled for. The entire relationship may even be viewed as a dynamic process whereby changes in public services affect private activities, which in turn lead to further changes in public policies and so on ad infinitum.

In this paper I investigate what can be said about the subject both in terms of general principles and by way of illustration in terms of concrete cases. The analysis is centered around three major questions —

1. What advantages can be hoped for by the private sector from the substitution of public for private urban services?
2. How should changing conditions in the private sector affect the provision of public services?
3. What differences result from alternative methods of public participation in the provision of services?

The Rationale of Public Services in a Free Enterprise System

Behind the entire discussion there must lie the basic principles involved in the provision of services by the public sector. We must understand precisely why it is considered appropriate in a free enterprise system to have the government intervene at all. The answer to our question is by no means trivial. After all, a widely held premise is the idea that, other things being equal, the extension of governmental activity is undesirable per se. Underlying this assertion there exist more subtle arguments which question the desirability of intervention. For example, there is the view that if the public desires any service sufficiently it will be willing to pay the requisite price. That is, on this assertion, any service supplied or subsidized by the government is likely to represent a misallocation of resources because it involves the provision of a good which is not worth enough to consumers for them to be willing to pay its cost. Or, in more general terms, it is sometimes argued that every governmental decision substitutes fiat for freedom of choice by the public, and any such decision must therefore be inferior, from the point of view of those affected, to what they would have decided for themselves.

These arguments are unlikely to appeal to many of us emotionally. We feel, somehow, that the market mechanism cannot be left to run itself entirely. It needs at least an occasional oiling, some maintenance, and a guard to see to it that no one sabotages the machinery. Even the most extreme of laissez-faire economists have admitted this. But what determines precisely whether a particular governmental service is desirable? Indeed, how can it be that a government, whose stated purpose is to serve its citizens, can improve their welfare by making some decisions for them?

Several grounds for governmental activity have been enunciated in the literature:

Ignornance or incompetence on the part of the public. Essentially, this is the basis on which governments intervene to protect minors or the mentally retarded. It is felt that such people simply do not know enough to take care of themselves and so someone must step in to protect their interests. These grounds are not likely to appeal to us in their most blatant form because we prefer to flatter ourselves on our knowledge and mental competence. Yet this argument provides the justification for a considerable variety of governmental measures. Examples are the pure food and drug act, which requires disclosure of information about ingredients, Securities and Exchange Commission regulations, which insist on the supply of data relating to securities issued on an interstate basis, and a variety of information services supplied by the Department of Agriculture and other government agencies. However, this rationale for government activity does not seem to play a very considerable role in the supply of urban public services and so we will not have occasion to return to it in this paper.

Prevention or amelioration of unfair arrangements. A second ground for government intervention is the feeling that the order of things involves basic inequities which should somehow be mitigated or at least prevented from getting out of hand. Police protection of the weak or honest from the stronger or unscrupulous falls under this head. Another major subject for concern here is poverty and inequality of opportunity resulting from disparities in the distribution of wealth and income. This second element in the rationale of governmental endeavor can be very significant for urban services. Free public education, slum clearance, and police activities are all substantial items in a typical metropolitan budget, and clearly they all relate to the protection of the individual who is either underprivileged or unprepared to defend himself against unlawful elements in the community.

Interdependence of members of the public. There is a third and far more subtle ground on which government activity can be justified in a free society. This is the view that the welfare of any member of the public does not depend on himself alone. Whatever anyone else does is likely to affect him and vice versa. As a result, given two self-interested individuals, A and B, if each independently goes about making the decisions which are best for him alone, the result may well be that the welfare of each falls well below the maximum available to him. A will have acted without taking into account the consequences of his behavior for B, and vice versa. As a result each will suffer from the want of consideration on the part of the other and hence they will both lose. In such a situation they may both benefit if they can agree on a third party (the government) who will see to it that they simultaneously act in a manner calculated to maximize their joint welfare, however defined.

This argument must not be understood to state that selfishness provides its own penalties. Neither individual acting by himself is likely to have the ability to produce a communal optimum by means of his own unsupported activity. Only governmental intervention can in this case offer the individual the opportunity to maximize his welfare, and to achieve what he really wishes. A concrete example may make this clear. Consider a street which is badly paved and which is adding to the automobile repair expenses of its residents (as well as to the costs incurred by motorists in transit). Suppose repaving can be financed and amortized at an average annual cost of ten dollars per resident and that this will (on the average) save him twenty-five dollars per year in automotive maintenance. Clearly, it is in everyone's interest to have the street repaired.

But no one individual can afford to do the repaving by himself. Moreover, if the hat were passed about the neighborhood each resident might well feel that his own individual contribution will not make the difference between failure and success of the enterprise. If, as a result, enough people hold out, the street is likely to retain its decrepit state, to everyone's loss. However, these same citizens who hesitate to contribute on a voluntary basis may reasonably support a special tax bill which requires each and every resident to pay his ten-dollar share of the cost of the improvement, if he knows that in this way he may expect to come out fifteen dollars ahead.

This rather subtle argument covers a wide variety of governmental activities. Familiar examples are the prevention of air pollution, the provision of public parks, street lighting, etc. Other, perhaps more timely illustrations will appear later in this paper.

The argument may conveniently be recapitulated as follows: The activities of and provision for the individual are likely to have so-called external effects — what happens to or is done by A, has a bearing for the welfare of B. These external effects are in many situations likely to be so widely diffused and spread about in such complex ways that the individual is powerless to do anything about them on his own initiative. Only appropriate governmental decisions or services can take the external effects into account and provide the framework within which the decisions of individuals who constitute the community will produce results consistent with the general welfare.

This externality argument serves, in effect, to transform the decision on private vs. public provision of some services into a matter which is primarily technological — the relevant question becomes, who can provide the services in question more effectively in the sense of contributing most to the public welfare per unit of resources employed. And the answer is that where external effects are very important, the public sector is often by far the more efficient supplier.

These three grounds now appear to constitute the rationale of governmental activity. However they must all be subject to a proviso. An extension of governmental activity may yield one or more of the types of benefits which have just been described—but that, by itself, is not enough to justify its introduction. For an addition to a government's role also has its costs. It may involve the use of resources which would otherwise be available to the private sector (a cost which is most important when a national policy maintains a high level of employment and a general shortage of resources). Moreover, if we believe that more government is, at least to some extent, undesirable per se, this too must be weighed as a cost. It may smack of the platitudinous to remark that in deciding whether to extend a governmental activity, attention must not be confined either to the benefits or to the costs alone. The extension should only be undertaken if the benefits can, on the basis of explicit analysis, be presumed to be worth the costs. Unfortunately, there are too many illustrations of partisan effusions in which this admonition is ignored, and where either only the benefit or only the cost of a governmental activity is taken into account.

Before leaving this very general discussion of the rationale of public activity it is desirable to consider briefly the determinants of the appropriate spheres of the federal and local governments.

There are two important reasons why some activities can advantageously be left to the federal government. These are closely analogous to arguments which have just been presented.

Regional inequality. Some regions may be considered too impoverished to be left to provide governmental services by themselves. For example, federal aid to education is sometimes advocated on these grounds; they also provided part of the justification for TVA.

Interdependence of different sectors of the country. Here we have the analogue of our last ground for governmental activity —the external effects of the acts of the individual. Similar possibilities hold for the localities which constitute the nation. Because people move about, improved education in City X is, in the long run, apt to redound to the well-being of City Y. Just as street lighting cannot be provided individual by individual, national defense cannot effectively be left to individual communities.

But there are limits to the effectiveness of these arguments. The extension of federal activities at the expense of the local government is not without adverse effects. The federal government may not be as knowledgeable about local conditions as is the man on the spot. Perhaps more important, a uniform national regulation is not easily made sufficiently flexible to adapt well to local requirements. The upshot seems to be that whenever an urban area of decision does not involve serious problems of regional inequity or substantial external effects, powers are best left in the hands of the local government.

Effects of Private Sector Changes on the Need for Urban Public Services

For some years now we have been witnessing an increase in the supply of urban public services and the scope of urban governmental activity. This development cannot be explained simply as a manifestation of Parkinson's law. Rather, it must be recognized that the need for governmental activity has grown as a result of developments in the private sector, and that changes in the role of the public sector have come about, at least in part, in response to these needs.

In reviewing these developments it must be emphasized that for our purposes the changes which have occurred in the private sector are appropriately treated as exogenous, that is, no attempt will be made to explain their occurrence. Rather, they will merely be described briefly and then used to help to explain developments in the supply of and need for urban services.

Growing Productivity and Wealth

One of the outstanding determinants in the demand for public services (as it is for commodities of any variety) is the magnitude of the flow of real purchasing power coming into the hands of the members of the community. As our income increases so does our effective demand for all sorts of goods and services. In the case of commodities dispensed through the market mechanism, this relationship is completely obvious and scarcely worth mentioning. People just use their higher real incomes to demand more goods ana that is all there is to it.

In the case of public services the connection is more subtle and requires some brief discussion. Clearly, people do not normally telephone municipal administrations and offer to pay higher taxes in return for improved services. Yet, as their wealth increases, gaps in the services provided by the government become less tolerable and are increasingly considered grounds for complaint. This is entirely in accord with the standard utility analysis of consumer demand which tells us that the rational individual will seek to keep the ratios of the marginal utilities of the items he consumes proportionate to their cost of acquisition. This means that a substantial increase in his rate of receipt of one type of commodity will normally be accompanied by an increase in his demand for others as well.

As a result, a school-leaving age which was formerly considered acceptable becomes intolerable as the community's wealth increases. Roads and garbage disposal standards are raised. Public pressure for these improvements gradually leads to their effectuation, which in turn may induce the enactment of the appropriate financial measures whereby the necessary resources are collected from the public. Through this process the effects of rising incomes are transmitted to the public sector right along with the increased demands for privately produced commodities.

While this machinery works in the right direction, it unfortunately is even less effective in approximating an optimal allocation of resources than is the market mechanism. To the individual recipient of a public service there is very weak and nebulous connection between the magnitude of the public services received and their direct cost to him. Indeed, there is always the temptation to regard a public service as costless, on the assumption (not always invalid) that it will be paid for by someone else. ...

Table of contents

• Cover
• Title
• Copyright
• Half Title
• Original Title
• Original Copyright
• PREFACE
• EDITOR'S INTRODUCTION
• Contents
• 1. Urban Services: Interactions of Public and Private Decisions
• 2. Changing Patterns of Local Urban Expenditure
• 3. Intergovernmental Aspects of Local Expenditure Decisions
• 4. General and Specific Financing of Urban Services
• 5. Toward Quantitative Evaluation of Urban Services
• 6. Benefit-Cost Analysis as a Tool in Urban Government Decision Making
• 7. Costs and Benefits from Different Viewpoints
• 8. Quality of Government Services
• 9. Spatial and Locational Aspects of Local Government Expenditures