THE WELFARE STATE AND PRIVATE ALTERNATIVES: TOWARDS AN EXISTENCE PROOF*
| Author | John G. Cullis,Philip R. Jones |
| Date | 01 June 1983 |
| DOI | http://doi.org/10.1111/j.1467-9485.1983.tb01005.x |
| Published date | 01 June 1983 |
Scorruh
JourM/ofPo/illca/
Economy,
Vol.
30.
No.
1.
June
1983
Q
1983
Scottish
Economic
Society
THE WELFARE STATE AND PRIVATE
ALTERNATIVES
:
TOWARDS AN EXISTENCE PROOF*
JOHN
G.
CULLIS
AND
PHILIP
R.
JONES
University
of
Bath
I
INTRODUCTION
In mainstream economic theory the basic unit of analysis is the individual
;
it is
people who have preferences and take decisions to maximise utility subject to
their budget constraints. However, it is also well recognised that certain
problems require some form of collective action which in practice has
generated the rationale for government activity. The basic arguments for
looking beyond the isolated individual have traditionally been collected under
the three functions of Musgrave’s
(1958)
public household. They are, ofcourse
:
Allocation, Distribution and Stabilisation. These responsibilities arise because
certain goods and services
or
activities either do not have the appropriate
characteristics that facilitate the operation of the market,
or
the market is
deemed to generate a distribution of burdens or benefits that
is
“unfair”. In
short, it may
be
argued that in certain circumstances the market will result in
either inefficient
or
inequitable outcomes, or both.
Britain’s Welfare State is a complex of in-kind assistance (health, education
services, etc.) and cash transfers (social security benefits) financed by general
taxation. Although stabilisation aspects are important to the fate of the
Welfare State, especially at times like the present when there is great concern to
reduce the size of public expenditure, this is a matter ignored here. It is simply
noted that some have made a case for government welfare provision partly on
the grounds that it facilitates demand management (see True,
1979).
A further
and more important limitation of
our
discussion is that distributional aspects
of the Welfare State’ will be discussed only tangentially, thereby leaving
allocation issues as the main focus
of
concern. In particular those goods and
services that exhibit a substantial externality will be at the heart of the analysis.
This is a revised and shortened version of a paper delivered at the European Consortium of
Political Research workshop
on
“Society and the Political Economy of the Welfare State” in
Aarhus, March
1982.
The authors are very grateful to Bruno Frey and other members of the
workshop for helpful suggestions,
as
well
as
to an anonymous referee. As usual, the remaining
errors are the property of the authors.
’
For
recent evidence suggesting that the least well omare not the main beneficiaries of public
policy provisions in Britain, see Le Grand
(1981).
Date
of
receipt of final typescript
:
20
December
1982.
7
91
98
J.
G.
CULLIS
AND
P.
R.
JONES
The paper emphasises the inter-relatedness of the different sectors of the
economy. Weisbrod (1975) introduces the so-called “three sector economy”
comprising the voluntary profit seeking sector, the voluntary non profit
seeking sector and the public sector. Although this distinction is important for
some purposes, in what follows, for the sake of simplicity, we subsume the first
two sectors under the heading private
or
voluntary sector. Far from wishing to
minimise the importance
of
the various sectors of the economy, a large part
of
the argument below seeks to establish that misleading implications have been
drawn about the public sector precisely because much analysis has studied it in
isolation from the private sector. In this sense the stance adopted has more
akin with a general rather than a partial equilibrium view of the world.
I1
THE
STATE
OF
PLAY
The “stereotype” Welfare State activities have been described as quasi
public goods. These are activities that in themselves are to a large degree
private goods being rival
or
divisible and excludable but their consumption
(or
lack of it) generates an external benefit (cost) to large numbers of other
individuals.
For
example health care and education services are rival in use,
but their consumption is a source of utility to others in society who may be
concerned to see the sick helped
or
to reap a reward in the fonn of the increased
wage that may stem from working with the more highly educated. (For a full
discussion of possible externality relationships in health and education see
Culyer (1971) and Blaug (1970) respectively.) Similarly with income transfers
there may be externality benefits to be reaped
if
individuals are concerned with
the fate of the poor
or
indeed fear their resentment (see Hochman and Rodgers
(1969) and Brennan (1973) respectively for arguments along these lines).
Despite the rival nature
of
service consumption
or
income transfers as such,
the externalities they generate involve the characteristics of public goods being
both non rival (we can all consume the knowledge that the sick
or
the poor
have been helped without affecting the quantity
or
quality of such a
commodity) and non-excludable (powers of observation are
all
that are
required to reap many of the externality gains associated with Welfare State
provisions). Given the postulated interdependent utility functions a move by
individual
A
to finance welfare type services for individual
B
(deserving in
some sense) will increase his welfare. If, however, individuals
C
and
D
also
move to aid B,
A
will similarly gain. If all potential welfare service financers are
in this situation there is an incentive to try and “ride free” and leave the costs of
such provision to others. If all individuals behave in this fashion no one will
“ride free” as the individual incentive structure eliminates voluntary contri-
butions to finance welfare services.
The argument outlined above provides a rationale
for
public finance as
opposed to public production
of
certain goods and services. In Buchanan’s
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