The Economics of Public Services

This paper is concerned with the relationship between income maintenance and housing subsidies. After reviewing some of the policy issues which have arisen in Britain and the United States, it examines the theoretical considerations underlying the design of housing subsidies in relation to household incomes.

Publicly financed positive action for housing may be justified on several grounds. One would hardly, however, consider as a good reason the pressure of the middle class to improve their living standards. In Italy, that pressure brought about a 25-year exemption from income tax on buildings for any nonluxury new housing, thus heavily damaging the source of revenue for local financing, particularly in expanding areas. The effectiveness of the low-cost housing programme financed through a 1 per cent tax on payrolls and additional State contributions, has been reduced by the fact that local authorities, who have to provide the land and the infrastructures, are increasingly indebted and finding it difficult to finance them, and by the complicated procedures for land condemnation and for the construction of these houses. The new law of 1971, which broadens the scope of the low-cost housing policy, has been impaired by similar factors and by additional bureaucratic complications, so that papers, rather than houses, have been produced. A much simpler solution, in which, at each regional level, global conventions—including land procurement, infrastructures, housing construction and/or urban renewal—are arranged with large contractors, is suggested.

The equilibrium distribution of schooling is studied when individuals differing in their natural endowments (n) decide on their schooling (S) on the basis of lifetime net earnings (I). The government affects the latter through the price of tuition and a given tax on earnings. The existence of positive interaction between S and n in earnings and a negative interaction on the resource-cost side makes for a strong positive correlation between the distributions ofn and S, and a regressive tuition fee under pure efficiency. Social welfare objectives will modify this relationship in the direction of a more egalitarian S and I distribution, and the trade-off is quantifiable. A tentative numerical example based on Israeli data is given at the end.

Much so-called redistribution is between similar people at different stages of life or fortune. The proper approach, therefore, is to look at redistribution between lifetime incomes. But this raises problems of choosing the discount rate and of specifying the assumptions about alternative policies. After discussion of these, attention is focused on specific problems that arise in relation to education, especially the distinction between incidence on parents and on children. Finally, the lifetime approach is applied to various educational policy options in Britain. Here only the effects on children are examined, using a new British earnings function. For any policy, this generates a distribution of incomes (present values). Each distribution is measured for equality, using the Atkinson index, so that a policy is desirable if it raises equality proportionately more than it reduces average income.

The facilities and processes that governments provide for resolving legal disputes constitute an important public service. For the resolution of some of these disputes, society turns to a body of laymen—a jury. In considering the fury as a conflict-resolving instrument, several interrelated questions arise concerning the jury’s size, the way its members are selected, and the voting rule that it uses in reaching its decision. This paper presents a theoretical structure to help address these questions. The model, which uses a statistical decision-theoretic framework, is then used to examine the specific issue of how ‘representative’ a jury should be.

Following a short introduction, consideration is given (section II) to a model, developed by Becker (1968), that attempts to describe the generation of, and optimum punishment for, illegal activity. It is shown that this model has no optimum finite solution for the case where punishment is costless (fines, according to Becker). Possible modifications are then discussed and it is suggested that the notion of retribution is required in order to explain observed penalties.

This paper examines the impact on social security benefits and taxes of (a) differential mortality by race, income, education, sex, and marital status; (b) differing ages of entry into the labour force; and (c) different lifetime earnings profiles.

The extended life-cycle model shows that the impact of social security on private savings depends on two opposing effects: wealth replacement and induced retirement. The net impact can be determined only empirically. The current study uses data for a cross-sectional sample of developed countries so as to evaluate both effects. The evidence indicates that increases in the extent of social security coverage and in the relative level of benefits substantially depress the rate of private saving.

The objective of this paper is to reach a better understanding of the way in which the social security system and macro-economic activity react upon each other. The particular example of France is studied. The first part of the paper presents the consequences for social security of a change in some aggregate variables, in particular in the inflation rate. In the second part, there is an analysis of the way in which the effectiveness of public expenditure stabilisation policies is affected by the social security system.

The aim of this paper is to show that social security in Italy is marked by large inefficiencies in resource distribution and allocation. Vertical redistribution is quite limited, mainly because of, first, the regressive effects of financing based on salary-geared contributions, and, second, the fact that pensions and family allowances are exempt from personal income tax. Most redistribution is horizontal, but there are also serious maldistributions, which go against vertical and horizontal equity. On the whole, the amount and the direction of redistribution seems often to have been determined by chance or by pressure groups. Inefficiency in allocation is serious in the health sector, where there is waste and where there are privileges for certain groups of citizens. Maldistribution, waste and privileges use up a considerable amount of social security finance. This amount could be used to meet the community’s strong and growing demand for more benefits for the poorer groups, especially for increases in the currently insufficient minimum pensions, and for better and more complete health services.

The use of intergovernmental grants is found in most countries. Governments (especially central governments) that encompass relatively large jurisdictions frequently supplement with grants of funds the revenues of public units at more decentralised levels. These grants are of two basic types: conditional and unconditional (‘lump-sum’). Among the former, a common type is the matching grant, where the recipient government is required to allocate funds from its own sources, in a specified ratio to the grant.

The purpose of this paper is to develop the broad outlines of the general theory of local public goods. The theory of local public goods is differentiated from the conventional theory of public goods in one important respect: in the latter, the population of each community is assumed fixed, while the theory of local public goods is concerned with the determination of the allocation of the population among the different communities.

A simplified model is produced to illustrate the proposition that, where efficiently operating cities compete on a world market, land rents representing the social opportunity costs of land occupancy will in each city aggregate to the sum of the intramarginal residues that reflect the economies of scale of the activities the existence of which within the city account for its optimal size being as large as it is. Full efficiency thus requires that all such land rents be devoted to the subsidy of these decreasing-cost industries, and the appropriation of these rents by landlords for other purposes precludes the achievement of full efficiency. Where such appropriation precludes efficiency elsewhere, and world prices are thus not at the efficiency level, it will be to the general long-run advantage of landlords in a particular city, as well as to locally constrained labour, for rents to be used for such subsidy, even though initially they may be inadequate to do the full job.

This paper contains a simple model of the assignment of functions among the jurisdictional levels that make up the public sector. The model rests on the notion that it is possible to classify the activities of individuals and governments who participate in the public sector and to impute costs—sometimes called transaction costs—to these activities. Following a description of the nature of these activities and costs, it is argued that an equilibrium assignment table, i.e. a cross-classification of functions on jurisdictional levels, can be determined. The paper then notes how misassignment problems can be dealt with by the use of interjurisdictional grants.

This paper proposes a formulation of problems of public economics—taxation, public production—within the framework of one-kind allocation models. It differs from the similar approaches by Boiteux and by Diamond and Mirrlees in that the (second-best) models are written in primal language—specifically without the use of indirect utility functions—and, thus, are nearer to usual Paretian formulations. The main topics are the conditions of production efficiency in the case of profit taxation, marketable public goods, and proportional indirect taxation with sectoral budget constraints.

Economic decisions almost always require intertemporal arbitrage. These arbitrage calculations are performed with the aid of a discount rate. In the classical theory of discounting, this rate is such that, for the marginal investments, the aggregated value of the benefit is equal to the invested capital The thesis of the present author is that the capital itself, independent of all intertemporal arbitrage, has an opportunity cost. The investment equilibrium depends not only on the discount rate, but also on the opportunity cost, which is as important as the rate of discount. The determination of the discount rate therefore is modified, as, of course, are all of the resulting choices.

This paper contains a description of the Soviet transport system, with its different kinds of services, and an analysis of transportation facts and figures. There is a high effectiveness of the system, with its large capacity to meet the people’s needs, its comparatively low fares and, at the same time, its satisfactory profits. These features of Soviet transport are related to the integration of all forms of transportation, to centralised management and planning, and to the system’s high technical level A very effective solution to the density problem of intra-city traffic is provided by public transportation, in particular the underground, in combination with other forms of transport The paper also includes information on the planning and co-ordination of transport and on problems of its further development.

A positive study of the intertemporal variation of public services and investment is undertaken, with special emphasis on the electoral period. The government is assumed to undertake public investments in order to maximise its utility over the current election period, subject to the constraint that such policy assures re-election. Government utility depends on various elements, to which the various parties assign different weights according to their ideology. Alternatively, it is assumed that governments want to maximise the time period during which they are in power. A major influence on public expenditures is exerted by bureaucracy, which is assumed to act incrementally and tends to maximise budgets.

This paper deals with the relation between the level and the structure of consumption and their influence on the labour productivity of the consumer. Assuming such a relationship, an optimal savings ratio will exist, below which savings are to be preferred over consumption and above which a consumption increase will contribute more to a rise in income than to higher savings. Empirical evidence is presented in so far as it was available to the authors.