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'' a '1 ' s i ". °. .+ "" ' r ± y ..' 3 yi>n r.,5 P - '-. r 4 ad , , .r }kaY f : [ w t i yr sr p , ,,, r''by,7" ". * r a 'v , " N a*' -rr ' " vng", rr ; a 3r , w a > f;'ia, } '3.s' N r'u a'a . r ''Ny " yk'' ° i4 fit, "r+ 'p, ?3i a"sY t 1-- t tp .3 cAp' "".>Sr. .,' rt ' r° e, ' .~,.P >w. ; a ; yr >A ia 'U'N F'aY" x'' .q x} '« a. a5 ,i , tT :. k , +" i Uwp "' " .p, ' '3'+v eYTa r ' rAar. .'' ", >, a v , r . yL" ir'>r r .r r r ,, ,< x +t c a. , >rrF av* = x t : ,- ' c 'fy r" f : '. r M . ' '°' ' f M, e W x 'gy'p '' ,G _ :'py~ . ai d r s ' 5 r .rx ,,. j y ' "ik3 :' ' ; . <, w n' ;t ' z ' ' it °3 ' f r , -" # >r r ' t t 13. A ' , r' n r - rtA ' ~'" ,y,'; r " ° ws F "r'r' . ark. vea t r , Lex.., y a r"' 7 ,,r ' ~ z }.-1 p nr," . r r a  m7 m - mN -.  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE by Donald R. Escarraz UNIVERSITY OF FLORIDA PRESS / GAINESVILLE, FLORIDA, 1966 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE by Donald R. Escarraz UNIVERSITY OF FLORIDA PRESS / GAINESVILLE, FLORIDA, 1966 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE by Donald R. Escarraz UNIVERSITY OF FLORIDA PRESS / GAINESVILLE, FLORIDA, 1966  EDITORIAL COMMITTEE Socia Sciences Monographs MARTIN E. SHAW, Chairmano Proofessor of Psychoology RALPH H. BLODGETT Profesorof Eoomicsk ARTHURW. COMBS Profesor of Educaion MNNIN J. DAUER Pr-ofesso. of Political Science T. LYN SMITH. Professor of Socoog~oy CERG D. 66 WINIUS oo Cofoof~ Hsoryoo boo~ Lfoo orCo.. Coo~o C...No. 66491 So 8.S- F' 3 67L4 tt ..3 .. C .. EDITORIAL COMMITTEE Social Sdcience. Monographs Mo.... E. SHAW., Chiroooo Professor of Psychology RALP H. BLODGETT Profesoro of Eoomicsf ARTHUR W. COMBS Profesor ofEduction MANNINGo J. DAUER Prodfesso. of Polhtical Science T.LYNN SMT Professor of Sociology GORGE D. WINooS Professor ofHitor Cooo o® of0 COPYRIGHT Coo No.66-64TH015 O S o s-a F'367 h, 3,.3 C. EDITORIAL COMMITTEE S oal Scienoes Monoographso Mooooo E. SoHA, Choirmano Professor of Psychology SALPH H. BODGETT Professor of Eoomoics ARTHUR W6. COMBS ProfessoroofEducaion MANNING J. DAUER Professor of Politiool Scieno, T. LYNNSMITH Pr-ofessor of Sociology CEORGE D. WINIU Professorof Hisor COPYRIGHT @19660Y.TH BOooDoOF COMMISSIONERS OF SoAoE INSTITUTIONS LIBRARY O. COoGooSo CAoALO. Cooo No. 66-64915 F3 47, z< ;. e.3 .  CONTENTS CONTENTS CONTENTS 1. Introduction ....... ............ 1 2. Graphical Models ................ 4 3. Revealed Preferences ............. 23 4. A Suggested Approach ............ 35 5. Taxes and the Political Process..... 48 6. Applications of the Suggested Approach .............. 59 7. Other Applications of the Theory ................... 66 Selected Bibliography ............... 76 1. Introduction ....... ............ 1 2. Graphical Models ................ 4 3. Revealed Preferences ............. 23 4. A Suggested Approach ............ 35 5. Taxes and the Political Process..... 48 6. Applications of the Suggested Approach .............. 59 7. Other Applications of the Theory ................... 66 Selected Bibliography ............... 76 1. Introduction ....... ............ 1 2. Graphical Models ................ 4 3. Revealed Preferences ............. 23 4. A Suggested Approach ............ 35 5. Taxes and the Political Process..... 48 6. Applications of the Suggested Approach .............. 59 7. Other Applications of the Theory ................... 66 Selected Bibliography ............... 76  UNIVERSITY OF FLORIDA MONOGRAPHS UNIVERSITY OF FLORIDA MONOGRAPHS Social1 Sciences, UNIVERSITY OF FLORIDA MONOGRAPHS 1. The Whigs of Floridat, 1845-1854, by H. J. Dohertty, Jr. Questtiont, 1918.1933, by A. Diaman. 3. The Siege of St. Augustinte itn 1702, by C. W. Atrttde 4. Newt Light onEarly atnd Medieval Japaneset Historiogrphy, by J. A. 5. The Stwiss Presst and Foreignt Af- fairs in, World War, II. by F. H. Decision,, 1789-1800, by J. K. Mahon 7. The Foundation, of Jacques Mari- taint's Political Philosophy, by H. Y. S. Lttitn Ametrican Population Studie, by T. L. Smtith 9. Jacksontian, Democrac,,y on the Flori. da Frontie, by A. W. Thomtpsott erby C. Joynert 11. Wfarey Economics atnd Subsidy Programst, by M. Z. Kafoglst tatti1 Aksakot, by E. Cbttielewski 13. City Managers in Politics: An, Termiti~on, byG. M. Kammerr,t C. S. Faryts, J. M. DeGyovy, antd A. B. Clbok~ 14. Reycent Sou.thern Econtomic, Develop. me sRevealed by the Chattging Structure of Empymenytt, by E. S. Dunntt, Jt. 15. Sea Powetr and ChileIn ~depend. encet, by D. E. Worcestert 16. Tb, Shermant, Atitrust Ayt and. Foreignt Trade, by A. Simmonsttt 17. Tbe Origins, of Hamiltont's Fisca~l Policit, by 0. F. Stttnsot 18. Crim~inal Asylum, in ngoSao CLaw, by C. H. Riggs, Jy. 19. Colytnia Baryn Hiscb, A Jewish Agricultural Colonty int Argenttin, by M. D. Winsberg mercyial Banktintg, by L L Cruttt 21. The Eatern Gryyenland Case int Hitorical Perspecti,y by0.Svar,. 22. Jacksoniant Demtocracy antd tite His- torians,, by A. A. Cavey 23. ThetRisefth SAmeicattChemity Profession,, 1850-1900, by E. H. Bolivian Agraiant Reformt, by W. E. 25. Conserttyives int the Progjessive Era:, Tbe Taft Republicatts of 1912. by N. M. Wilenskby of tht Territorial Sta, by T. Kttbt. yttbi 27. Tb, Liqutidity Struc.ture of Firmt, atnd Monttarty Econom~tics, by W. J. Fraty, St. 28. Rust,-Persittt Cyommeycial Ryla- titons, 1828.1914, by M. L. Ettttr 29. The Imtter.ial Policy of Sir Robyyt Borden,, by H. A. Wilsont 30. Tht Associtiott of Incomte attd Ed. ucaytional1 Aybievemtt~t, by R. L. Las. titer, Jr. 31. Tht Relbtiyon of t Peoyle to the, Lantd itt Souttr Iratq, by F. Bashi 32. Tht Price Theory of Value itt Pub- lic Fittatte, by D. R. Eeyeatat 1. Tb, Whigs of Florida,, 1845-1854, by H. J. Dohety, J, Questiott, 1918-1933, by A. Ditamatt. 3. Tb, Siegt of St. Augustitne itt 1702, by C. W. Arnade, 4. New, Light onEarly antt Medieva.l Jaypanese Hitoritotttyby, by J. A. 5. The Sw,.iss Press. and Foreigtt Af. fairs itt World War, 11, by F. H. 6. Tbe Amttrican, Militit: Decae of Decisiont, 1789-1800, by J. K. Mabon 7.TS, Foundtiott of Jacques, Mari- tin's Politia Philosophy, by H. Y. by T. L. Sttith 9. JacksonianDemocry,,onthetFloi- dtt Frotttie, by A. W. Tbhomtyttn of Aus.traiantt Commonwaltht Poy- erby C. Joyner 11. Wfarety Ecottnytitcs and Subidy Progrtamt, by M. Z. Kafoglis 12. Tribune, of te Slayayhiles: Kott- sittttit Aksakov, by E. Cbhmiylewskbi 13. City Managers int Politics: Att C. S. Fattis, J. M4. DeGryve, antd A. B. Clbokt 14. Recettt Southertt Ecottnotiy Develoy. mnasReveale~d by the Changittg Styuyturey of Emplymnttt, by E. S. 15. Set Power attd Chileant Iynyypeyd. ence,. by D. E. Worcester 16. Tbe Sbherman Atitttust Act antd Foreigtt Trade, by A. Sitttmontt 17. Th, Origins, oj Hamyiltott's Fiscal Policies, by 0. . Swansont Law,, by C. H. Rigg, J. 19. Colonia Barott Hirsch, A Jewish by M. D. Winsberg 20. Ti,,, Depoits itn Present-dty Com-. mercyial Banttittg, by L L Crum, 21. Th, Eastt Greln Case itt 22. Jackson~iantDemocry an,,d theHi. torians, by A. A. Cave 23. Tbe Rise of te Ameryiycan Chemity Profesion,, 1850.19001, by E. H. otlivian Agrariatt Reformt, by W. E. 25. Conservatives itt the Progressive Era:, Tb, Taft, Republicants of1912, by N. M. Wilenskby 26. Tb, Attglo-Norwetgittt Fitberies Case, of 1951 and tbe Changittg Law, of te Territorial St, by T. Koba. 27. Tb, Liqutidity Styruyture of Fiyrmt antd Monttary Economtic, by W. J. 28. Russo-,Periant Coymmercial Rela- tions., 1828-1914, by M. L. Entner 29. Tb, Impyeial Policy of Sir Robert Borden, by H. A. Wilson 30. Th, Associaiont of Inome and1 Ed- ucaionttal Achbievemett, by R. L. lest. tite, Jr. 31. The Relation tf tit, People to the Laditt Soutbtern Iraq, by F. Bshl 32. Tb, Price Th,,o,. of Value itt Pub- 1. Tb, Wigsotf Floid, 1845-1854, by H. J. ohbery, J. 2. Autiant Catolics and tit, Social Questtio,,t 1918-1933, by A. Ditamttt. 3. Tb, Sitge of St. Au.gustite itt 1702, by C. W. Amade4 Japanese, Hitoriograpby, by J. A. 5. Tb, Sw~iss Press and Foreign Af- fa.irs itt World War,, 11, by F. H. 6. Th, Ameicant Militia: Decadet of Deyitiont, 1789.1800, by J. K. Mahon, tansPoltical Philosophy, by H. Y. by T. L. Sm.ithb da Frontie, by A. W. Thompsont 10b Holman Vtersus Hughes: Extension ers, by C. Joyner 11. WfF are, Economicsy and Susidy Programs, by M0. Z. Kafoglis 12. Tribune of te Slamphiles: Kontt sat Aksako, by E. Chmiel1,wski 13. City Managers in. Politics: Att Temntoby G7. M.Kamr, C. S. Fari, J. M4. DeGrove, and A. B. Clbokb~ 14. Recet Southern Ecottomic Develop- mnasRevealed by thy Chanitg Structbure of Employmentt, by E. S. 15. 3,,. Powe, ,,4 Chilean Iyndypend- ecby D. E. Worcestert Foreigtt Trade, by A. Sitmmonst 17. Tb, Origitts of Hamiltn' Fiscal Plicies, by . F. S,,,,son La, by C. H. Riggs, J. 19. Colottia Barin Hirsch, A Jewyish Agicutural Colotty itt Argetttittt, by M. D. Win,,berg merc~ial Banbitg, by L L. Crum, 21. The Eastern, Greenland. Case itt 22. Jackbsoiant Democray antd the Hit- torians,, by A. A. Cave 23. Tb, Ris, of te Americatt Chemity Prfsin 1850-190, by E. H. Boliviant Agrarian, Reform,, by W. E. 25. Conseryvaives in the Progressite by N. M. Wiletttby 26. Tb, Anglo-Noyrwegitan Fitbeyies Case of 1951 an.d tbe Chaning CLaw of tite Territrial 3Se, by T. Kobe. 27. Tb, Liquidiy Styrucbure of Firm,, and4 Monttary Economic, by W. J. tions,1 1821-1914, by M. . Entner, 29. Tb, Imperyial Plicy of Sir Robert Borden,, by H. A. Wilsont 30. Tb, Association of Inome antd Ed- ucational4 Achievemet, by R. L. Las-. tery, J. 31. Tb, Relationt of the People to the Landl itt Southern Iraq, by F. Bashi 32. Tht Pice, Theory of V14lue itt Pub- lic Fittn,,, by D. K. Etytt,,t  PREFACE PREFACE PREFACE The voluntary exchange or price theory of pub. lic finance has a history which is as long as the history of the price theory of private goods, if the number of years is the basis for the length of his- tory. However, very few economists have attempted to develop the theory further as an explanation of political or economic behavior or to apply it as a criterion for policy decisions of government. The theory has not reached the degree of acceptability which the price theory of private goods has reached. This difference in acceptability can be explained in part by the existence of certain criticisms of the price theory of public finance which are not rele- vant to, or at least have never been raised with re- spect to, the price theory of private goods. Another part of the difference may be explained by the ab- sence of the development of a general framework in the price theory of public finance which could be used for a wide range of problems and which could be used to indicate the relationship of the two theories. This monograph attempts to approach both of the above factors which have to some extent limited the acceptability of the price theory of public fi. nance among economists. The final chapter il- The voluntary exchange or price theory of pub- lic finance has a history which is as long as the history of the price theory of private goods, if the number of years is the basis for the length of his- tory. However, very few economists have attempted to develop the theory further as an explanation of political or economic behavior or to apply it as a criterion for policy decisions of government. The theory has not reached the degree of acceptability which the price theory of private goods has reached. This difference in acceptability can be explained in part by the existence of certain criticisms of the price theory of public finance which are not rele- vant to, or at least have never been raised with re- spect to, the price theory of private goods. Another part of the difference may be explained by the ab- sence of the development of a general framework in the price theory of public finance which could be used for a wide range of problems and which could be used to indicate the relationship of the two theories. This monograph attempts to approach both of the above factors which have to some extent limited the acceptability of the price theory of public fi. nance among economists. The final chapter il- The voluntary exchange or price theory of pub- lic finance has a history which is as long as the history of the price theory of private goods, if the number of years is the basis for the length of his. tory. However, very few economists have attempted to develop the theory further as an explanation of political or economic behavior or to apply it as a criterion for policy decisions of government. The theory has not reached the degree of acceptability which the price theory of private goods has reached. This difference in acceptability can be explained in part by the existence of certain criticisms of the price theory of public finance which are not rele- vant to, or at least have never been raised with re- spect to, the price theory of private goods. Another part of the difference may be explained by the ab- sence of the development of a general framework in the price theory of public finance which could be used for a wide range of problems and which could be used to indicate the relationship of the two theories. This monograph attempts to approach both of the above factors which have to some extent limited the acceptability of the price theory of public fi- nance among economists. The final chapter il-  lustrates some of the uses of the theory in the past and the prospects of its acceptance by more eco- nomists in the future. There is no doubt that the critique of criticisms of the theory presented here is incomplete. Indeed, there may exist errors in interpretation and analysis both with respect to the critique of criticisms and with respect to the suggested approach. However, if more issues are clarified by the presentation than are confused, the author will consider that he has achieved the purpose of the monograph. The field is currently confused, and yet it is one which may have a tremendous potential. Therefore, the monograph may have value even if it does not clarify issues but does cause other economists to reconsider the field, and they as a result clarify the issues. My indebtedness is acknowledged to Dr. Ansel M. Sharp who started me into the study of the price theory of public finance and led me through a dis- sertation on the subject at Oklahoma State Univer- sity. I am also indebted to Dr. Milton Z. Kafoglis of the University of Florida for his encouragement. It was Dr. Kafoglis who originally suggested that my dissertation should be published and then urged me on to incorporate in it my latest work in the field. The result is that less than half of the original dis- sertation is contained in this monograph. I also wish to express my thanks to the editors and readers for the Social Sciences Monograph Se- ries for their comments and suggestions, and to the typing pool of the College of Business Administra- tion for their prompt and eflicient service. Finally, but not least, I wish to thank my wife and three children for putting up with me during the many months of writing, rewriting, and waiting that have gone into this monograph. The author of any orig- inal work goes through much but his family un- doubtedly suffer more. DONALD RAY ESCARRAZ lustrates some of the uses of the theory in the past and the prospects of its acceptance by more eco- nomists in the future. There is no doubt that the critique of criticisms of the theory presented here is incomplete. Indeed, there may exist errors in interpretation and analysis both with respect to the critique of criticisms and with respect to the suggested approach. However, if more issues are clarified by the presentation than are confused, the author will consider that he has achieved the purpose of the monograph. The field is currently confused, and yet it is one which may have a tremendous potential. Therefore, the monograph may have value even if it does not clarify issues but does cause other economists to reconsider the field, and they as a result clarify the issues. My indebtedness is acknowledged to Dr. Ansel M. Sharp who started me into the study of the price theory of public finance and led me through a dis- sertation on the subject at Oklahoma State Univer- sity. I am also indebted to Dr. Milton Z. Kafoglis of the University of Florida for his encouragement. It was Dr. Kafoglis who originally suggested that my dissertation should be published and then urged me on to incorporate in it my latest work in the field. The result is that less than half of the original dis- sertation is contained in this monograph. I also wish to express my thanks to the editors and readers for the Social Sciences Monograph Se- ries for their comments and suggestions, and to the typing pool of the College of Business Administra- tion for their prompt and eficient service. Finally, but not least, I wish to thank my wife and three children for putting up with me during the many months of writing, rewriting, and waiting that have gone into this monograph. The author of any orig- inal work goes through much but his family un- doubtedly suffer more. DONALD RAY ESCARRAZ lustrates some of the uses of the theory in the past and the prospects of its acceptance by more eco. nomists in the future. There is no doubt that the critique of criticisms of the theory presented here is incomplete. Indeed, there may exist errors in interpretation and analysis both with respect to the critique of criticisms and with respect to the suggested approach. However, if more issues are clarified by the presentation than are confused, the author will consider that he has achieved the purpose of the monograph. The field is currently confused, and yet it is one which may have a tremendous potential. Therefore, the monograph may have value even if it does not clarify issues but does cause other economists to reconsider the field, and they as a result clarify the issues. My indebtedness is acknowledged to Dr. Ansel M. Sharp who started me into the study of the price theory of public finance and led me through a dis- sertation on the subject at Oklahoma State Univer- sity. I am also indebted to Dr. Milton Z. Kafoglis of the University of Florida for his encouragement. It was Dr. Kafoglis who originally suggested that my dissertation should be published and then urged me on to incorporate in it my latest work in the field. The result is that less than half of the original dis- sertation is contained in this monograph. I also wish to express my thanks to the editors and readers for the Social Sciences Monograph Se- ries for their comments and suggestions, and to the typing pool of the College of Business Administra- tion for their prompt and eflicient service. Finally, but not least, I wish to thank my wife and three children for putting up with me during the many months of writing, rewriting, and waiting that have gone into this monograph. The author of any orig- inal work goes through much but his family un- doubtedly suffer more. DONALD RAY EsCARRAZ  1. INTRODUCTION 1. INTRODUCTION 1. INTRODUCTION The voluntary exchange or price theory of public finance had its origin in the benefit approach to taxation, but it never has had the widespread acceptance enjoyed by that approach in the eighteenth and nineteenth centuries. The causes of this lack of acceptance are the primary theme of this monograph. More specifically, an attempt is made to show that the criticisms of the theory are not a suficient reason to completely reject it. In the process of analyzing the major criticisms, suggested approaches to the theory and applications to the political process are presented. There are many aspects to the voluntary exchange approach to pub- lic finance, but its essence can be understood by simply considering it to be the application of the whole body of price theory to the problem of the supply of goods and services by the government. This view of public finance requires that the revenues of the government (taxes) be consid- ered together with the expenditures of the government. The expenditures must be considered as costs of producing public goods and services. The government is, thus, a producer or firm in the economy, similar to pri- vate firms. Economists have not generally accepted this concept. In fact, economists have often discussed the expenditure activities of the govern- ment in terms of its being a consumer. The notion of the government as a consumer may have been an outgrowth of Adam Smith's belief that some of the expenditures of the sovereign are for unproductive labor. The unproductive-labor concept has dropped out of economic literature, but not the concept that the government consumes goods and services when it makes expenditures. The non-acceptance of the concept of the government as a producer enters the discussion throughout this mono- graph. The most important theoretical concepts which must be accepted with the price theory of public finance are related to the revealing of pref- erences for public goods. The theory implies that public goods do pro- vide satisfaction to the individual and that the individual associates the satisfaction with the quantity of the public goods available to him. It also implies that the individual will reveal his preferences for public goods if given the opportunity. The non-acceptance of these concepts is discussed in the first part of Chapter 3. Richard A. Musgrave has placed importance on the determination of 1 The voluntary exchange or price theory of public finance had its origin in the benefit approach to taxation, but it never has had the widespread acceptance enjoyed by that approach in the eighteenth and nineteenth centuries. The causes of this lack of acceptance are the primary theme of this monograph. More specifically, an attempt is made to show that the criticisms of the theory are not a suflicient reason to completely reject it. In the process of analyzing the major criticisms, suggested approaches to the theory and applications to the political process are presented. There are many aspects to the voluntary exchange approach to pub- lic finance, but its essence can be understood by simply considering it to be the application of the whole body of price theory to the problem of the supply of goods and services by the government. This view of public finance requires that the revenues of the government (taxes) be consid- ered together with the expenditures of the government. The expenditures must be considered as costs of producing public goods and services. The government is, thus, a producer or firm in the economy, similar to pri- vate firms. Economists have not generally accepted this concept. In fact, economists have often discussed the expenditure activities of the govern- ment in terms of its being a consumer. The notion of the government as a consumer may have been an outgrowth of Adam Smith's belief that some of the expenditures of the sovereign are for unproductive labor. The unproductive-labor concept has dropped out of economic literature, but not the concept that the government consumes goods and services when it makes expenditures. The non-acceptance of the concept of the government as a producer enters the discussion throughout this mono- graph. The most important theoretical concepts which must be accepted with the price theory of public finance are related to the revealing of pref- erences for public goods. The theory implies that public goods do pro- vide satisfaction to the individual and that the individual associates the satisfaction with the quantity of the public goods available to him. It also implies that the individual will reveal his preferences for public goods if given the opportunity. The non-acceptance of these concepts is discussed in the first part of Chapter 3. Richard A. Musgrave has placed importance on the determination of 1 The voluntary exchange or price theory of public finance had its origin in the benefit approach to taxation, but it never has had the widespread acceptance enjoyed by that approach in the eighteenth and nineteenth centuries. The causes of this lack of acceptance are the primary theme of this monograph. More specifically, an attempt is made to show that the criticisms of the theory are not a suficient reason to completely reject it. In the process of analyzing the major criticisms, suggested approaches to the theory and applications to the political process are presented. There are many aspects to the voluntary exchange approach to pub- lic finance, but its essence can be understood by simply considering it to be the application of the whole body of price theory to the problem of the supply of goods and services by the government. This view of public finance requires that the revenues of the government (taxes) be consid- ered together with the expenditures of the government. The expenditures must be considered as costs of producing public goods and services. The government is, thus, a producer or firm in the economy, similar to pri- vate firms. Economists have not generally accepted this concept. In fact, economists have often discussed the expenditure activities of the govern- ment in terms of its being a consumer. The notion of the government as a consumer may have been an outgrowth of Adam Smith's belief that some of the expenditures of the sovereign are for unproductive labor. The unproductive-labor concept has dropped out of economic literature, but not the concept that the government consumes goods and services when it makes expenditures. The non-acceptance of the concept of the government as a producer enters the discussion throughout this mono- graph. The most important theoretical concepts which must be accepted with the price theory of public finance are related to the revealing of pref- erences for public goods. The theory implies that public goods do pro- vide satisfaction to the individual and that the individual associates the satisfaction with the quantity of the public goods available to him. It also implies that the individual will reveal his preferences for public goods if given the opportunity. The non-acceptance of these concepts is discussed in the first part of Chapter 3. Richard A. Musgrave has placed importance on the determination of  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE a single best solution in the allocation of resources when public goods are involved. This determination is treated in the last part of Chapter 3 and in Chapter 4. The latter chapter also suggests an approach to the price theory of public finance. A model is developed which attempts to show a single best solution analogous to the Pareto optimum. The price theory of public finance does require that taxes be viewed as a price paid for goods and services. The taxpayer is a taxpayer- buyer. If the political organization is taken into consideration, the tax- payer can be considered a voter-buyer, since he indicates the quantity of goods and services he desires through his vote rather than through the taxes paid. Taxes are the prices paid for the goods and services actually supplied, but the determination of what quantities of goods and services should be supplied is based on the taxpayers' voting in the political process. Therefore, the determination of the individual's taxes constitutes the allocation of the value or costs of the goods and services. Economists have not generally accepted this concept of taxes as a price or as an allocation of value or costs. In fact, taxes are often considered to be little more than a form of coercive activity of gov- ernment which is inherent in the nature of the state. These problems are discussed in Chapter 5. That the taxpayer is a voter-buyer may thus be implied by the price theory of public fimance. In any case, the concept of the voter-buyer does imply the existence of a particular type of political mechanism. The voter-buyer not only must want to reveal his preferences for public goods, he must have a means by which to do so. Therefore, the political mechanism cannot be ignored by an economist accepting the price theory of public finance. The effect of the political mechanism upon the degree of coercion in taxation is discussed in the last part of Chap- ter 5. The suggested approach of Chapter 4 and the approach adopted to analyze the criticisms in Chapter 5 become the basis for possible appli- cations of the price theory of public finance in Chapter 6. Chapter 7 backs up to take a look at some existing applications of the theory by economists and to look at the prospects for further applications by other economists. Richard A. Musgrave and Alan T. Peacock, Classics in the Theory of Public Finance, is a minimum requirement to place the arguments presented here in proper historical perspective. Musgrave, The Theory of Public Finance, is necessary background for the specific criticisms that are discussed here, and for seeing the basis upon which the sug- THE PRICE THEORY OF VALUE IN PUBLIC FINANCE a single best solution in the allocation of resources when public goods are involved. This determination is treated in the last part of Chapter 3 and in Chapter 4. The latter chapter also suggests an approach to the price theory of public finance. A model is developed which attempts to show a single best solution analogous to the Pareto optimum. The price theory of public finance does require that taxes be viewed as a price paid for goods and services. The taxpayer is a taxpayer- buyer. If the political organization is taken into consideration, the tax- payer can be considered a voter-buyer, since he indicates the quantity of goods and services he desires through his vote rather than through the taxes paid. Taxes are the prices paid for the goods and services actually supplied, but the determination of what quantities of goods and services should be supplied is based on the taxpayers' voting in the political process. Therefore, the determination of the individual's taxes constitutes the allocation of the value or costs of the goods and services. Economists have not generally accepted this concept of taxes as a price or as an allocation of value or costs. In fact, taxes are often considered to be little more than a form of coercive activity of gov- ernment which is inherent in the nature of the state. These problems are discussed in Chapter 5. That the taxpayer is a voter-buyer may thus be implied by the price theory of public finance. In any case, the concept of the voter-buyer does imply the existence of a particular type of political mechanism. The voter-buyer not only must want to reveal his preferences for public goods, he must have a means by which to do so. Therefore, the political mechanism cannot be ignored by an economist accepting the price theory of public finance. The effect of the political mechanism upon the degree of coercion in taxation is discussed in the last part of Chap- ter 5. The suggested approach of Chapter 4 and the approach adopted to analyze the criticisms in Chapter 5 become the basis for possible appli- cations of the price theory of public finance in Chapter 6. Chapter 7 backs up to take a look at some existing applications of the theory by economists and to look at the prospects for further applications by other economists. Richard A. Musgrave and Alan T. Peacock, Classics in the Theory of Public Finance, is a minimum requirement to place the arguments presented here in proper historical perspective. Musgrave, The Theory of Public Finance, is necessary background for the specific criticisms that are discussed here, and for seeing the basis upon which the sug- THE PRICE THEORY OF VALUE IN PUBLIC FINANCE a single best solution in the allocation of resources when public goods are involved. This determination is treated in the last part of Chapter 3 and in Chapter 4. The latter chapter also suggests an approach to the price theory of public finance. A model is developed which attempts to show a single best solution analogous to the Pareto optimum. The price theory of public finance does require that taxes be viewed as a price paid for goods and services. The taxpayer is a taxpayer- buyer. If the political organization is taken into consideration, the tax- payer can be considered a voter-buyer, since he indicates the quantity of goods and services he desires through his vote rather than through the taxes paid. Taxes are the prices paid for the goods and services actually supplied, but the determination of what quantities of goods and services should be supplied is based on the taxpayers' voting in the political process. Therefore, the determination of the individual's taxes constitutes the allocation of the value or costs of the goods and services. Economists have not generally accepted this concept of taxes as a price or as an allocation of value or costs. In fact, taxes are often considered to be little more than a form of coercive activity of gov- ernment which is inherent in the nature of the state. These problems are discussed in Chapter 5. That the taxpayer is a voter-buyer may thus be implied by the price theory of public finance. In any case, the concept of the voter-buyer does imply the existence of a particular type of political mechanism. The voter-buyer not only must want to reveal his preferences for public goods, he must have a means by which to do so. Therefore, the political mechanism cannot be ignored by an economist accepting the price theory of public finance. The effect of the political mechanism upon the degree of coercion in taxation is discussed in the last part of Chap- ter 5. The suggested approach of Chapter 4 and the approach adopted to analyze the criticisms in Chapter 5 become the basis for possible appli- cations of the price theory of public finance in Chapter 6. Chapter 7 backs up to take a look at some existing applications of the theory by economists and to look at the prospects for further applications by other economists. Richard A. Musgrave and Alan T. Peacock, Classics in the Theory of Public Finance, is a minimum requirement to place the arguments presented here in proper historical perspective. Musgrave, The Theory of Public Finance, is necessary background for the specific criticisms that are discussed here, and for seeing the basis upon which the sug- 2  geoted approach wras developed. An attemspt hao beon made to present Musgrave's criticismts and his adaptation of Paul A. Samuaelson's model, but these are not a oobotitote for reading Muogrove'o original work, oioce his criticioms ore lifted oot of the oontext in sohich they were presented. gested approach woo developed. An attempt boo beeo mode to present Muograve's criticisms and his adaptation of Poul A. Samsuelson's nmodtl, hat these ore not a substitute for reading Musgrave's original work, since his criticisms are lifted oat of the context in which they were presented. gested approach was dereloped. An attempt has hero made to present Musgrave's criticisms and his adaptation of Pool A. Samuelson's model, hot theoe are not a suhotitute for reading Musgrave's original work, since his criti*cisms are lifted oat of the contet in which they were presented.  2. GRAPHICAL MODELS The development of the voluntary exchange theory of public finance since the turn of the century has centered around three graphical models and Knut Wicksell's concept of unanimity. To be sure, other writings since the turn of the century are directly or indirectly related to the voluntary exchange or price theory in public finance, but the graphical models with Wicksell's unanimity principle sufficiently bring out the main points of the approach. Therefore in this chapter there is an attempt made to restate three of the geometric models and to state the unanimity principle in graphical form, so that the main points of the theory can be understood and the interrelationships among the presentations can be recognized. Musgrave's criticisms of the Lindahl model are also considered in this chapter because they have been a stumbling block to the general understanding and acceptance of the approach in the United States. ERIK LINDAHL AND KNUT WICKSELL In 1919 Erik Lindahl, a Swedish economist,' presented a simple graphical model which attempted to establish the total expenditure on a public good and the relative tax shares of two classes of society. Class A (the relatively well-to-do) are represented by legislators A and class B (the relatively poor) are represented by legislators B. It is assumed that there is an even distribution of political power between the two groups. It is also assumed that all economically related public services are lumped together so that the total cost is the total cost of a group of services rather than a single service. Figure 1 shows on the abscissa the relative share of the total cost of providing a given public good. Reading from left to right is the rela- tive share of A, and reading from right to left is the relative share of B. Various levels of total cost (V through Z) are shown along the ordi- nate. The curve AR indicates the total expenditure on the public serv- ice at various relative cost shares to which legislators A would agree. Logically, A legislators are willing to have a greater total expenditure made, if class A of society can pay a smaller percentage of the total 1. See Musgrave and Peacock, pp. 168-76, for a translated chapter from Lin- dahl, Die Gerechtigkeit der Besteuerung. (Full information on cited works is in the Bibliography.) 2. GRAPHICAL MODELS The development of the voluntary exchange theory of public finance since the turn of the century has centered around three graphical models and Knut Wicksell's concept of unanimity. To be sure, other writings since the turn of the century are directly or indirectly related to the voluntary exchange or price theory in public finance, but the graphical models with Wicksell's unanimity principle sufliciently bring out the main points of the approach. Therefore in this chapter there is an attempt made to restate three of the geometric models and to state the unanimity principle in graphical form, so that the main points of the theory can be understood and the interrelationships among the presentations can be recognized. Musgrave's criticisms of the Lindahl model are also considered in this chapter because they have been a stumbling block to the general understanding and acceptance of the approach in the United States. ERIK LINDAHL AND KNUT WICKSELL In 1919 Erik Lindahl, a Swedish economist,' presented a simple graphical model which attempted to establish the total expenditure on a public good and the relative tax shares of two classes of society. Class A (the relatively well-to-do) are represented by legislators A and class B (the relatively poor) are represented by legislators B. It is assumed that there is an even distribution of political power between the two groups. It is also assumed that all economically related public services are lumped together so that the total cost is the total cost of a group of services rather than a single service. Figure 1 shows on the abscissa the relative share of the total cost of providing a given public good. Reading from left to right is the rela- tive share of A, and reading from right to left is the relative share of B. Various levels of total cost (V through Z) are shown along the ordi- nate. The curve AR indicates the total expenditure on the public serv- ice at various relative cost shares to which legislators A would agree. Logically, A legislators are willing to have a greater total expenditure made, if class A of society can pay a smaller percentage of the total 1. See Musgrave and Peacock, pp. 168-76, for a translated chapter from Lin- dahl, Die Gerechtigkeit der Besteuerung. (Full information on cited works is in the Bibliography.) 4 2. GRAPHICAL MODELS The development of the voluntary exchange theory of public finance since the turn of the century has centered around three graphical models and Knut Wicksell's concept of unanimity. To be sure, other writings since the turn of the century are directly or indirectly related to the voluntary exchange or price theory in public finance, but the graphical models with Wicksell's unanimity principle sufficiently bring out the main points of the approach. Therefore in this chapter there is an attempt made to restate three of the geometric models and to state the unanimity principle in graphical form, so that the main points of the theory can be understood and the interrelationships among the presentations can be recognized. Musgrave's criticisms of the Lindahl model are also considered in this chapter because they have been a stumbling block to the general understanding and acceptance of the approach in the United States. EmK LINDAHL AND KNUT WICKSELL In 1919 Erik Lindahl, a Swedish economist,t presented a simple graphical model which attempted to establish the total expenditure on a public good and the relative tax shares of two classes of society. Class A (the relatively well-to-do) are represented by legislators A and class B (the relatively poor) are represented by legislators B. It is assumed that there is an even distribution of political power between the two groups. It is also assumed that all economically related public services are lumped together so that the total cost is the total cost of a group of services rather than a single service. Figure 1 shows on the abscissa the relative share of the total cost of providing a given public good. Reading from left to right is the rela- tive share of A, and reading from right to left is the relative share of B. Various levels of total cost (V through Z) are shown along the ordi- nate. The curve AR indicates the total expenditure on the public serv- ice at various relative cost shares to which legislators A would agree. Logically, A legislators are willing to have a greater total expenditure made, if class A of society can pay a smaller percentage of the total . See Musgrave and Peacock, pp. 168-76, for a translated chapter from Lin- dahl, Die Gerechtigkeit der Besteuerung. (Full information on cited works is in the Bibliography.) 4  cost. The curve BS indicateo the total expeaditare on the public service at various relative cost shares to which legislators B would agree. At X level of total expetnditure, group A would agee onaly if group B would pay 60 per centof the total cost, while group Bould agreonly if group A would pay 72 p er cent of the total cost. The equilibrium solution is clearly at the iutersection og the too aurora at P. The total exspeaditure to be made osn the group of public services is Y. Aagreesto pay 60perccent ofY, whilerBgrees topay 40per cenu of Y. Total Cost of Public Service I . Total Cost of Public Service /----- w x Y cost. The curve BS indicates the total expenditure on the public service at various relative coot shares to which legislators B would agree. At X level of total expenditure, group A would agree only if group B would pay60 per centof thetotl cost, whilergroop Bwould agree ouly if group Awould pay 72 pea cest ofthe total cot. The equilibriom solutions is clearly at the intrsection of the two curces at P. The total eopeoditure to be made oo the group of public services is Y. Aagees to pay 60peracet ofY,owhile Bagrees topay 40pr cautsol Y. Total Cost of Total Cast of Public Seroice Public Service A-s B0 0 0 0 0 60 7 O 0 10 50_ uo 70 60 50 ao 00 20 10 0.-B_ W ~ ~ ~ ~ ~ ~ ~ ~ Fgr 5.__ _ _ _ __ _ _ _ _ _ __ _ _ _ _ Th fact _____ thtseLuximdlepair h oiia rcsi the~~~~~~ deeriotouo-hwmuh hul b upledau hoshud a Ta ~~~~~~~Figure 21h.idh oeli rcdb hedoe uvsA 2.Mhoe th a h y Einahaodel Theoyzof Pthei plitca proce; ins afoc theece on ac mannerosis n a. t th7oiiclpic.lsli 3. 0cc Mindahlo odeacck pp. 7t11,formsaass of Wickselsnnmiypinils may weal of thc principle; ace Uhr, Ewcooic Doctrioca of Knot W~icksall, yp. 164-00, and 0. Seligmaa, Moin Carrers in Madrs Economics, pp. 559-60, fsa interpre- cost. The curve BS iudicates the total expenditure on the public service as various relative cost shares so which legislators B would agree. At X level of total expeuditure, group A woold agrecaly if group B would pay 60per centofthe total cost, while group Bwould agreeronlyif group A would pay 72 par cast of the total coat. The equilibriom solotiou is clearly at the iutrsection of the two curves at P. The total eopetnditure to be mode on the group of public werviem is Y. Aagreesto pay 60 per cest ofY, whileB agrees topay 40per cent of Y. Total Cost of Total Cost of Public Seesioa Public Seroice A B z ---------- ----7 0- 0 10 2D 30 00 50 60 70 eO 90 100 100 50 00 70 60 50 40 30 20 10 0.-B Figure a. The foot that the Lindahl modal emphasizes the political paocess i the determinatioa of how much should be supplied and who should poy foe the service an a manner consistent with the political principles laid down by Kuot Wicksell has bees recognizedt Howeve, a peeatation of the Lindahl model in terms of Wicksell's uanimity principles may be useful before evaluatiug the criticisms of the Linahl model. In Figure 2 the Lindahl model is traced by the dashod curves AR 2. Musgrave, "Voluary Echansge Theory of Public Fiance," p. 205; Mus- Erase, Thcey of Pablic Finance, p. 74. 2. Sec Mosgrave aod Peacock, cc. 72-110, fara ansltioa of Wickoll's state- weal of the principle; are Uhr, Economic Doctrines of Knut IWichacli, cc. 164.00, and 0. Seligman, Mois Carreros is Modero Econaomica, pp. 550-60, for interpe. IA-0 1D 20 30 00 50 60 70 RD 90 100 100 50 80 70 60 50 00 DO 20 ID 0.-B Figure 1. The foes that the Lisdahl model emphasizes the political process iu the determination of how much should be supplied ond who should poy for the servive in a maauer consistent with the political principles laid down by Knut Wicksell has hero recoguizedt Howevr, a presenation of the Liudahl modal iu terms of Wicksell's uunaimity prinoiplet may be useful before evaloatiag the criticisms of the Lindahl model. In Figure 2 the Lindahl model is srauced by the dashed vurves AR 2. Musgrave, "Volunary Exchange Theory of Publc Finaace," p. 210; Mos. gavo, Theory of Pubic Financm, p. 74. 3. See Musgrave sod Peacock. pp. 72.118, isa a translatioa of Wicksell's state. weal of the principle; see Uhr, Ecoomic Docsiebs of Knut Picksed, yp. 064.80, and 0. Seliguan, Mais Currens an Modea conomia,,ca, cc. 559-60, for interpre- 5  and BS, withs mainbill A representnga total expenditure ofV, amntd- moent A', a total expenditure of W, etc. Reading the graph an terms of Wicksell's unanimitty principle, the abscissa reading right to leftmes ures the percetageof goupBwho wold vtefor vaiousepedi- tare bills woith various tax plans. Tao plan a favors groap B swhile tax Total Cast of Total Cost at Public Seroice Public Servict a A- - - - - - E t bMain Bill a b" 0c at F \\ a b a'd K0 -0-fi Am A-0O 10 20 30 40 50 60 70 80 90 100 -6 la0 100 t0 60 40 20 O-B Figare 2. plan i favors grasp A. Theso tao plans ran he rosverted into the tee- tminology of the Lindahl maodel with the following schedule. TaxPlan A B a 90%aoftotal cost 10%ofttal cot 6 00," " 20%" c 70%""" 30%"" d60%' " 40%"" e50% " '" 50% "" f 40%"" 60%"" 9 30%" " 70%"" It 20 " " 80% "" i 10% "" 90%" The carve DQ connecting all of the a' points indicateo the perceot- age of A legislators soho swould vote for the various expesditure pro- poalsowith tax plao a (i.e., class Aof society to pay 90 per cent of the total vast). Tlhecursve EQ caoecting all of the a points isdicates the peraentage of B legiolatoro wcho would vote for the various ropeoditure propoals ith tapla a(i.e.,clasBof society topay 10pret and BS, withamain bill A representing atotalvexpenditure of V,amend- menat A', a total expeoditure of Weta. Reading the graph in terso of Wicksell's uanimaity priciple, the abscissa readiag right to left aseas- ares the percenage of group Bsohoawould vote for varios ependi- tare bills with various tao piano. Tao plan a favors group B while tao and BS, with main bill Arepreseting a total expenditare of V, amsend. meat A', a total expenditare of W, eta. Reading the graph is trns of Wichsell's uaninsity principle, the abscissa readiog right to left taeao- ures theprceatage of group B who would vote foe various expendi. tare biltt with various tao piano. Tao plan a favors groap B while tax Total Cast ot Total Cost Public Seroict Pablic St I A acat 0 h' ' a t'b 4 f h- - -- -- 9 / E ___ e t L / d f i--'bl o K._0 M- 1..o~ . tain till Aae y Tatal Cast ot Total Cost Public Seice Pablic Sn t -------------------- -EB 1> / 0 / N " a d___ _L rvict A A" A"' IA+0l20IA 0 od40 60o8 70904010 . . . 100 100 lao so 60 40 20 O -t Figare 2. plan i favors groap A. These tao plant van he ronverted into the tee- nminolagy of the Lindahl model with the following schedule. TaxoPlas A B a 90% oftotalaost 107%aofcotalvost b 00% " " ' 20% " " o 70% """ 30%" "" I0%60% " 40% "' o 50%" " 50% """~ O 40% " " 60% a 30% """, 70% """" It 20% "" 80%"" i00% "" 90%" The carve DQ connecting ail of the a' points indicates the perceat. agr of A legislators who woald vote for the varioas expenditare pro- pooals withotaxplanaa (i.e.,vclassoAof societystopay0 perees of the total vast). The carve EQ connecting all of the a points indicates the percentage of B legislatoco who woald vote far the variosexpesditure propoals wih taplan a(i.e., classB ofocviety topay 10 per cent 6 IOlao 1005 60 40 609 b008 130-s Figure 2. plan i favors groap A. These tao plans van be converted into the tee' mnology of the Lindahl nodel with the following schedale. Tax Plan A B a 9% of total cost 10%aoftosta t b 00%" " 20%", c 0,30. 60% "" 40%"' f 50%" " 60% "" 9 30% " "". 70% It 20% "" 807i170% "" The carve DQ connecting all of the a' points indicates the percent- age of A legislators who woald vote for the various expenditure pew- posals with tax planoa (i.e., clasoA of society to pay 90prcent of the total cast). The carve EQ connecting al1 of the a points indicates the percentage of B legislators who would vote foe the various expenditure proposalscwith tax plan a (i.e., class B of soviety to pay 10 percent 6  of the total cost). The only proposal which can obtain perfect ua. nimnity is Amnendmsent A"' with tax plan d. In terms of the Lindahi moodel iis the Ylevel of total costswith clasApaying 60 perecent of Y and classB paying40 per centof Y.On AmndmentA" with ax plan g, none of the B legislators and only 65 per cent of the A legis- lators would vote for the proposal. On Amnendmnent A" with tax plan c only 15 per cent of the A legislators and 75 per ceat of the B legis- latoes woald vote for the proposal.a Both Wicksell and Lindahl, howeeo, recognized the practical limita- tion that the legislature probably woald never be restricted by a perfect onaniomity rule. Therefore, Wickoell accepted the concept of approxi- mate uanrimity, and Lindahl diocassed the effects of dropping the as. sumption of equal political power. The results1f either of these practi- cal conoideatiossmay be thatequilibrium can be achieved insanarea arournd point P, depending apse which bill ond tax plan approximating Amendment A" with tax plan d isxvoted on first or which group is society has an advantage in political power. More specifically using just the Wicksell model, the equilibrium level of expendiure and tax plau can be seen to depend upon the level of unanimity required and the order in which the proposals aresvted upon. Asming 100 legislators is group A and 1f0 in group B, and assuming that the majority rule is accepted as approximate unanimity, equilibrium can take place foe Amendment A"" with any tax plan, becausealluof the taxplanstwill get 100 per centsofthecvote of the B legislators and enugh of the vote of the A legislators to make a majority vote. Ta plan aor bwould alsoe acepted as an equi- librium proposal with Amendment A". With Amendment A"'any of the tax plans, b,c, d,e, f, og,willbecceptd under themajoity rule concept of approximsute unanimity. The exact combination of bill and tax plan to be accepted woold depend estirely on which one was first presented f or a vase.5 Accordiug to Lindahl, it unequal political power exists, the solation will lie on SPR of the Lisdahl model in Figure 1. BPS is the total 4. With the Wicksell-Lindahl model, the question oi what goods should be supplied by tss governmoent is also detrmeesd becuse onle thcse gocds which see capable ci receicinsg erfsect unaniwity should tbr supplied. S. Wickselt suggests thot, is the case of aproxcimate unasimity, all propoals shosld heoted cn and tise oc with thse greatest tctal cots be accepted. This requirewent would limis the equilibrium solutions to Amendment A"'with tax plan dand AmendmentsA wsithsanyoftshe taxplns, sice tese aretheepro- osals which wuldeceive a 100 per centyeasvoe cos oe geoup or the other. of the total cost). The only proposal which can obtain prfect una. nimnity is Amendment A"' with lax plan d. In terms of the Lindahl model it isthe Ylevel of total costswith class Apaying 60 per cent f Y and class Bpaying 40 per cent of Y.OnAmendment A" with tax plan g, none of she B legislators and only 65 per cent of the A legis- latses wouxld vote for the proposal. On Amendment A" with tax plan cosnly' t5 pee cent of the A legislators and 75 per cent of the B legis- lators would vote fur the proposal.0 Both Wicksell and Liudahl, however, recognised the practical limita. tion that the legislature probably would never be restricted by a perfect unanimity rule. Therefore, Wicksell accepted the concept of approxi- mate unanimity, and Lindahl discussed the effects of dropping the as- sumption of equal political power. The result of either of these practi. cal considerationssmayberthat equilibriumecan be achieved in an area around point P, depending upon which bill and tan plan approximating Amendentu A" with tax plan d isrvoted on first or which grasp in society has an, advantage in political power. More specifically using just the Wicksell model, the equilibriam level of expenditure and tax planucan be seen to depend upon the level of unanimiy required and the order inwhichhe prposals are voted upon. Assurming 100 legislators in group A and 100 in group B, and assuming that the majority rule is accepted as approximate uonanimity, equilibrium can tube place fur Ameudment A"" with any tax plan, because all of the tax plans will get 100 per cent of the vote of the B legislators and enough of the vote of the A legislators to makea majority vote. Tax plan a or b wuld alsc he accepted as an equi- librium proposal with Amendment A". With Amendent A"' any of the tax plans, be , d, e, f, or g, will he accepted ander the majority rule concept of appruximate unanimity. The exact combination of bill and tax plan to be accepted would depend entirely on which one was first presernted f or a vote.t Accordiug to Lindahl, if unequal political power exists, the solution will lie on SPR of the Lindahl model in Figure 1. BPS is the total 4. Wish the WichsellLindahl model, the question oi what goods should he supplied by thrs governmect is asr detrmined becuse only those goods which see capable ci receiig preect unanimsity shsould hr sprlied. 5. Wichsell scggests thot. in the care ci upproximute unanimity, all roposals rhoutdhbesvoedconuadrheceoith hegegtesttoalvotehbe accepted. This equiremre would limis the eqcilihrium solutiocs to Amendment A"'with rax plan d und Awendment A""with any ofithe tax plans. rise these are she pm- posals wsich would rerceice al10c ceer s voate of one roupcorhe oher. of the total cost). The only proposal which can obtain perfect una- nimity is Amendment A"' with tax plan d. In terms of the Lindahl model it is the Ylevel of total costwith class Apaying 60 pee cents1f Y and clas B paying 40 per cent of Y.On Amendment A"with tax plan g, none of the B legislators and only 65 per cent of the A legis- lators would vote for the proposal. On Amendment A" with sax plan conly 15 pee cent of the A legislators and 75 per rent of the B legis- lutors would vote for the proposal.4 Both Wicksell and Lisdahl, however, recognised the practicol limita- tion that the legislature probably would never be restricted by a perfect unansimity rule. Therefore, Wicksell uccepted the concept of approxi- mate unanimity, and Lindahl discussed the effects ci dropping the as sumption of equal political posr. The result of either of these practi- cal considerations may be that equilibrium can be achieved is an area acrond point P, depending upon which bill and tax plan approximating Amendent A"'with tas plan d isovoted os first or which group iu society has an advantage in political power. More specifically using just the Wicksell model, the equilibrium level of expenditure and tax plan can be seen to depend upon the level of unanimity required and the order is which the proposals ure voted upon. Assuming 100 legislators in group A and 100 in group B, and amsuming that the majority rule is accepted at approximate unanimity, eqailibrium can tab, place for Amendment A"" with any tax plan, because all of the tax plans will get 100 perncentuof the vote of the B legislators aud enough of the cots at the A legislators tu make a majoriy vote. Tax plan aor bwould also beaccpted s an equi- librium proposal with Amendment A". With Amendment A"' any of the tax plaus, be , d, e, f, or g, will be accepted under the majority rule concept of approximate unanimity. The exact combination of bill and tax plan to be accepted mould depend entirely on which axe was first presented f or a votes5 According to Lindahl, if unequal political power euists, the solation will lie on SPR of the Lindahi model in Figure 1. BPS is the total 4. With the Wicksmll-Lindahl model, the question ci chat oods should he supplied by she orenet is alrso determied becae on ly those goods which aecapable of receivicg perect unanimwiry should be supplied. 5. Wichsell scggerts that, is the case ci apprcximae uaniwity, nll propsals ahculdhbescoerdcsnadrheceoithhegeastrtcalccotehe acepted.This reqcieent ould limit she esquilibrium solutiocs tc Amendment A"'with tru plan d and Amendment Aw ith any ofcthe tax plans, sisce there are the pmo- posals which wouldreeive a 10 r centyeasote ao negerup orchroher. 7  expenditure which tho B legitlatort would detite at varying too shtaring planse attd APR it tht total topeoditute which the A legitlatort would desiee at varying tax uharing plans. PS is Ite segmenot uf BPS whticht it capable uf obtaining pered unanimoity and PR iu thte segument of APR which it capable of obtaioing poolect uwattimity. Therefore, with Litndahl's cottcept of unequal political potwer, which it int teerts of 0n0 groapts ability Ia force its detirot upott the other group, the solutiotn will lio ont PS if B hastthe greater political power antd oR PR if A hat the greatet political puwee. However, if uttequatl political power it accepted at being any toution reached by cottpromise othee thant the optiwum tolutiott which cau ho touched with perfect untanimity, tho equilibrium can bea large numbheroftsolutionsarountd the poitP inigure 2. Nu tmatteo what pulitical cooditiotts eoiot or which concept of political powor it accoptod, the cotmbitted Wicksell-Liudahl ttodel would appeao to ho uteful int explaittittg the resultt of tho political procest. Equilih- rium will take place arountd point P in any case, and all that would rm it i to accutately etaluate tho political process int oreo to do- temine tho actual oquilibeiut which will tube place. Int February, 1939, Muogoave publiohed att article woith au ioterpre- tatiott of Liodahlts tuodel, hut Mugoaveco conclusionso wete the oppotite of thote ateived at int the foregoittg interpretation of the Wichsell- Litudahl ttodel. "To suwtmariae: at ant interpretation of the actual eo- penditureeproces, thevoluntary exchange theoey wasfound uaccept- able because of the utucealittic ttature of the voluntary exchattge assumuptiont int gettetal attd of the comtpetitive peiciug assumtptiont in particular. Asta solutiont to the theory of tax justice it wat fountd stricotly depetndent upott the premuite of cotmpetitite poiciog; the definition of the juetice probletm ettployed, woteocer, appeated eucessivelynarw At stantdards of referentce foe attalytis antd appraisal of actual rvne expettditureopolicie, thecvolunttaryooxchanogetmodel anditscoollary, the neutralevenou-expenditue process,ueeefouttdunacceptable." Mutgrave's rejection of the theory int getneral becute of the utnreal- istic uatuee af thecvolutary eochattge awsumptiott it bated att the fact that "direct comlpulion prevailt int the legal enforceent of itndividual taxucontributions, itndepettdetttly of the individual's willittgttets to uhate o patt uf the burentt"t Howevee, otte answer to thit criticistu it that the 6. "Volutry CxchangeTheoroy,"p. 231. Theoluotaryoechangtetheorocas a stacdardofefeenoce foreaalysistodforeteuteaingadipotace oflthe oeta evenue-expeonditure process it the primaroncer o000a the monogrtph; tee elecially Chtpteru 5laud 6. 7. Tuxes asla f000 of coercion oilt be considered in more detail it Chapter 5. eopetnditure which the B legitlatort would desie at varying tax sharing plans attd APR it the total expenditure whicht the A legislatort wauld desire at varyintg tax tharintg platns. PS it the segtmettt uf BPS which it capable of obtaining pered uanimity and PR it the segmentt of APR which it capoble of obtaitting perfect uttattimity. Therefore, with Littdahls onttept of uttequal political power, which it int tormo of one group's ability to foece its desiet upott the othet group, the solatiott will lie onPS if Bhasthegeaterpolitical poweruand on PR if Ahasthe gotater political pooer. Hawecer, if unequal political powet it accepted at beintg any tolution reached by comprotmise other thano the optimumu solution which cat he teached with peefect unanitmity, the equilibriutt canbe a largettnumberoftolutionsarountd the point Pin iue2. No wallet what political conditiottt exist 00 which cattcept of politieal power is accoptod, the cottbined Wicktell-Littdahl ttodel would appear to he usefal in explaininf the resultt af the political procest. Equilib- rium will take plaearound point P in attycate, attdall that would rm it i to accurately evoluate the political ptoesst int order to de- termitte the actual equidibrium which will tube place. Int February, 1939, Musgrtaco publiohed an article with att itterpre- tatiott of Littdahl's mtodel, hut Musgfte'o conclusicons were the opposte of thote arrived at int the foegointg ittterpretatiot of the Wickuell- Littdahl model. "To sumarize: at att interpretatiott of the actual ow- penditure process,thecolunttaryyexchange theory wasfoud uttaccept- able because of the uttealistic ttature of the voluntary echange assumoptiont in gonetal attd of the comepetitice pricinf astumptiott in particular. Asta solutiaon to the theory of tax juttice it was fountd sttietly depentdent upont the pretmite of comepetitivo peicing; the definitiont of the juttioce probletm ettployed, moreocer, appeared excessivelynarw At standards of referentce foe attalytis atnd appraital of actual eentue- expettditueepoliciesthecvolunttary exchangemodel anditscoollay, thetteutral evenue-eopenditure procest, wre fouttd utnacceptohle."t Musgrave'orejectiotof the theoryit fetteralhbecause oftheuteaul istic ntature of the volutary exchange assumtptiont it hated ont the fact that "diect cottulsiot pecailt int the legal enfoecemenlt of individual taxucotibutiont, ittdepentdently of the ittdividual's willittgtest to uhare o part of the buedett "7 Howecor, otto attower to this critiecito it that the 6. "Voluaryo Exchoge Theoy, p. 23.Theolnaru echantethorcas Eustandard ofreferoenelfor analysisandlfortheeaninad iotace of the netaoevenue-expeoditure processoisthepiury-cocero oftheonograph; ee eupocially Chapteot 5 and 6. 7. Taxes at a foom of coerciont oill he considered it wooe detail it Chapter 5. expettditure whieh the B legitlatoot would desite at varying tao sharing platts attd APR it the total expettditure which the A legitlatort would desire at varyittg tao sharing plats. PS it the segtoent of BPS which isocapable of obtaining peefetuanimity andPR isthetegmetof APR which it capable of obtaittiog perfect uanimity. Therefore, with Litndahl's cottcept of uttequal political power, which it io tertmt of otto feoupts ability to fodce its desiest upott the othee group, the tolutiott will lie ow PS if B hasuthe greter political power antd on PR if A hus the greatec political power. Howeer, if ottequal political powet it aecepted at beintg anty tolutiow couched by cotmpromise other than the optimutm solutiott which caR he teached with perfect utnattitoity, the equilibrium cantbeoalarge numberoofosolutiosaounod the poit Pinuigue. No wallet what political conditiono eoist or which contcept of political power it acceptod, the cottbitted Wicksell-Littdahl model would appear to he useful int explaittitg the esultt of the political ptooess. Equilib- rium will take placeoarountdpoint Pint anycase, atdall that would rm it i to uccurately evaluate the political procoss in ordeo to de- tertmitne the actual equilibriutm which will tahe place. Itt February, 1939, Musgeace published ant article with att interpr- tatioo of Littdahl's model, hut Musgeacets conclusions wete the oppooite of thote aeciced 01 itt the foregoing ittterpretatiot of the Wickoell- Lindahl umodel. "To summtarize: at ant interpretatiot of the octual ext- pettditureeprocess, thecvolutttary eochuttgetheorywasfoutduaccpt. able because of the unrealistio oaturt of the colutacy exchattge assutpion in gotterul atnd of the ceopetitive peiciug asoutmptiono int particular. At a solutiono to the thory of too justice it wao fountd strictly depettdent upon the prewise of comopetitie pricing; the definitiot of the justice peoblem employed, woeocer, appeared excesstivelynarw At stantdards of refteence lot anaolysis and appraisal of actual rvne eopentureepolicie, thecvolutttary eochattgewmodel anditscoollay, the tteutral revenue-eopendituee pooceto, were fouttd uttacceptable."' Musgravets rejection of the theoty int getteral because of the aunreal- istic ttatoe of thetvolutary exchantge awsumptiont it booed ott the faet that "ditect comepuloion poecails int the legal ettforeentt of itndividual taxotributions, intdependently of the ittdividual's williwgness to ohace a part of the burdeno."7 Howevet, otte attswet to thit coiticitsm it that tho 6. "Volutary Exchuonge Theory," p. 231. The voluntary eochaote theor0 al a staodard of oefeteoce foe analystis aod focothe meaning and impootance of the netralreveueoepeditue process it the priwa oncer 000a the Rooaph; see ecpcialey Chapteot 5 ald 6. 7. Taxesuastaform of coerion willhbeconidered inoreoodetail inChaptert. 8  situationt in the private economty ocannot he soid lo be very diffeentt. In the private economsy, aR insdividualo issumed to hove a dceand for ony particolar good sobich rolates the qoootities of the good sohich the individual woould scoot to prchbase to vorioos prices. ODOR the itsdi- vidual hot exspressed his demoand by masking the purohase, loses of society, genseally, protect tho seller frost the bu~yer's changinsg his mintd. Its the voiluntary exschange msodel the insdividual it ssueRId to hose as simtilar type of demtand for eooh typo of putblic good. The in- dividool, howoeveo, permoito his representatie its the legitlatre toin terpet this deman~d sohedusle. Otsoe the legislotor has expesosed this domand by acceptintg a particularevel50 of exspenditure antd tots plots, the purchose has beets masde. The laws of society, as is the cse of the privote good, protoot the seller froos the boyes ohatsgitsg his tmitsd. Oce the demtsond is espeed by pochase or by the legislotors' soting faorabsly forthe peovidintgsofopprduct oo sooviseswithoaptiolar tots plots the teassotios is comspleted sod ilaws pootect the pooties of the solo lom ohotsgos is the indisidual's sobjectise evaltsatiott of the quantity he wantts ot tho price ogreed opots. The prohboeo whioh Musgeose seemos to hose discussed uneder the head- isg of the comopulsise nsoture of the politico1 process is just the oppo- site of coseplios The problese lies in sehether tor Rot the fatsotshot cosepolsion exists offeots the indisidtsal's expreseed destaotd. Its the peivote econosey it is ossoseed thee it does tsot.t Its the politicol procets it maoy beseore questionsable, hot, in the opinsion of thisswriter, Moe- goose has toot gives o sutfficient resont foe the rejeotions of the theory is genseral. Musgeose's rejection of the theoey hsectsse of the comspetitise pole- isng assotmptiont its particular is joel a ftsrther tatementt of his rejec- lists of the theory its genseral. Musgravsedid sot recognizethe onseness of his tseo hoses foe eejectio. Ho did eot coesidee thot cosepulsion ex- ists onsly ogle0 o demantd is espressed and that this comptslsiots is tsot very dissiseilar to the cosepulsiots that esists with a private good oncoe doeand hasbeets expesed thoghlegl puehsof the good.The effects of bargaitsitsg power or politico1 poer sehich Musgrase coo- siders 000 merely as atsalysis hosed ots ots asesemptiots thot the exist- Ot t is she oppossite sf sesepulsions is shot it revolvs aounstd the itsdividual's beltsg feee to expess his detsatd without cosspulsios stsd even so reeotetcif Its equilibrisum solutisn is nos deeseised which is consistcsebb wihoh demaod epressed. 9. Thoes is liole osso literature ots the essesseic effects so poivooae ii- ingtansbsluoctoeuranee of stiesation oyote moey bach. situaotions its the private econsomey cannsot be sold to he very diffeenst. Its the prisate econsomy, an insdividual is asesuseed to hose a demantd foe atsy paeticular good sehich relates the quaotities of the good which the itsdisidtal seould seatt to puechose to sarious poises. Onsce the itsdi- sidualbhas expressed his deseatdhbymakitsgthe puechaselasssf society, generally, potect the seller frose the buyer's chansgintg his meind. Ins the volunstary exchansge meodel the intdividual is ssumssed to hose a siseilar type of deseotd foe each type of poblic good. The its- disiduof, howeer permeits his r epresetatise its the legislature ts its- teepeet this demantd schedale. Once the legislaor has expreseed this demantd by acceptinsg a particular lesel of expensditure and too plots, the puechase hoc beets mae. The loses of sciety, as its the case of the peisote good, protedt the sellee lros she buyer's chasgisg his seitsd. Otsce the demanod is expeeseed by purchose sor by the legisiotoes' sotisg faoraebly forethe providintgofsapoduct oresersiceswithoapaticlar tots plots, the tratsactios is comspleted and loses potect the poetics of the sole los chotsges its the itsdividual's stsbjectiso esalutont of the quantiybheswantsat the picegeedoppo. The peoblese sehich Mosgeose seeses to hose disesed unsder the head- ing of the omsputlsive ntsurte of the politico1 prosess is jut the oppo- site of cosepulsios~ The problese lies its swhether sor tsot the loot that comepolsion esists offects the indisidtsal's extpreseed demantd. Its the peisote econosey it is ossoseed thot it does tsot.t Its the politicol posess it masy besmore questionaoble, hot, its the opinsions of thisswrite, Mus- grose hoe sit gisens a sufficientt reasons foe the rejectiont of the theory Musgravses rejectiots of the theory becoose of the omspetitise peic- insg assmptions int particuslar is just a furother stateenst of his rejec- tionofteetheoryis getealMusgavsdidsnoteognioe theon es of his tso hoses foe rejetion. He did tsot cstssidee thot sssepslsios exs- ists onsly after a doemand is espeessed atsd that this sosepolsiots is ntss very dissimeilar to the compulsiots that exists woith a prisate good one demantd hasbeen espeessedthrotsghoalegal ptrse ofosthe good. The effects of bargaitsing power sor politico1 powee sehich Mtusgrase on- siders are merely SD anaolysis hosed ots ots assumeptions thos the exst- 8.tt is she opposite of comepulsicon is thoe it resolvs aounsd the iodisiduao's hbel free to expeess his deseand without cstspulsiots asd esets to eentraot if equilibrisum solstice is cot detesmieisd which is cosisteel wih she dlemand espressed. 9. Thoec is little or so liteature on the econoseic effects sf a privote hose gis- ingsanssolute guarantee ofesisfaotists oyote moesoyback. situaotions its the private ecoom~sy canneot he said to be very diffeentt. Its the private ecoomy, ats insdividual is asesmed to hose a demantd Ice tsty paeticolae good sehich relates the qoostities of the good which the itsdisidual seould seatt to poechose to various poises. Once the itsdi- sidual hoc espeessed his demaned by seaking the puechase, loses of sosiety, generally, potect the selfler ferom the buyer's chatsgisg his seind. Int the votaroy extchange seodel the insdividuaol it asesmed to hose a simeilar type of demantd foe each type of public good. The its- disidool, howeer, perseits hi s represetatise its the legislature ts in- teepeet this deseatd scheduole. Osce the legislaor has espressed this demanosd by acceptinsg a particular level of exspentditure anod tas plots, the purchate has bees seade. The loses of society, as is the case of the peisate good, proteot the sellee los the buyer's chatsgisg his seiod. Otsce the deseatd is espressed by purohose sor by the legislaors' sotisg faorablyforethe proiditsgofoapodto seeeiceewithoapeticle tots plots, the teansactios is comspleted otsd loses proteot the parties of the sole los chatsges its the itodisiduol's sobjeotise esolutotios of the quatstity he owtsts ot the peice agreed opons. The peoblem which Musgrase seemes to hose discussed unsder the head- itsg of the coseputlsive ntsutte of the political press is joel the oppo- site of comspulsiostt The problese lies iD wehethee oe tsot the loot thot omspulsiosexistsoaffects the indisidttal's expeeseeddemasond. Ito the peisote economey it is ossoumed thot it does nsot.' Its the political peocess it maoy beseore questionabl, hot, ins the opinsions of thisserite, Mus- gravsohaostgiessfficietesos fortheerejection ofttheheoy its genseral. Mosgeose's eectiots of the thorey becoose of she cometitise pric- insg assptios iD particuslar is just a foether statemesnt of his rejec- tionsof the thory ingeneral.Musgraveedid noterecognize theon es of his two hoses foe eejestios. He did tsot cstssider thot coseplsions exs- ists onsly after a demantd isosxpeessed atsd that this cosepolsios is tsot svery dissimeilar ts theomplsiots that exists wish a peisate good onsce demantd hasbees expesedthoughoalegal purchase ofthe good. The effects of bargainisg power sor politicol powee which Musgeose cost- siders aee meely ots assolysis hosed ots SD assemptios thot the exst- Ot t is the opposite of cosepulsicon intshat it revolvs aocnsd she individul's beingo free so expeess his detsatd thout omplsios sand etsn to eeontret if anequilibriume solution is coo dceemined which is consistent with she detsand 9. Thee is hotle sor no literature on she econsomic effects o prisote hose lit. engaas oe guaeantee of satisfaction oyote seoneyhbach. 9  rose of comopulsion, after a quantity at a posse has bees expesed, affects the qoaotity schich scoold be topressed. Moograve's analysis, fhowever, is primarily is terms of the iodivid- ual's realizing shot his expressd demoand will affect tbe price. This analysis is based oR Lindahl's statemen~t of the smodel (i.e., that onein dividoalos demaod curve is tbs other iodividual's sopply carve). Poet of the problew, hoscever, seems to be shot Musgravo switches his analy- sis to the individual froos the political procesort10 I his analysis the individualorecognizesthat his ropressd desmadis going tooaffert his cost and, therefore, heswillonot epress his truedemanod." Howevr, if it is rewemobered that the soluntary eochange msodel tobes place is political setting, at least poet of Musgrace's citicisms coo hr dropprd. 'The isndisidual is ot dieectly bargoiniog with another isdividual for the eschoange of two goods. Two groops of legislators ore attemptinsg to oh- taio the quaotity of a good which the iodividuals, whom she legislator represents, swoold wanot at o price cosisotent swith thot qoaotity. The leg- islotor doss ot hare to obtaiR the lowwst possible pokce for vros qoootities to satisfy she iodividoals he reprserts. All thot the legielotor most obtoiss is a quantity asd peice selationship which the individuals that he represensts consider sotisfoctory. Theeefore, is conoot he as- sumedsthatthe demand curves willhbeaffectedhbythe foct that the price is offected by she demand exprewsed by the legislotor. Price caR- no1 he removed from its relatioship to quantity jost becoause the good unsderoconsideration is a poblic good. If lbs legislator is attempting to wasimize the satisfartion of those individuaols whow he eepresens, he most express a demaod which relates quaotityond priceond it mst be o qoostity osd price relationship indicated by the demood corso io the Lindahl model hecooss this carce by definitios is the schedule of quantities wohich she individuals woold wool at various prises. To ex- prews aoy other qoasstity-price rrlotiosship would pot the legislosor io tbs position of ot troly represrolisg lbs individuals shot pot him iR office. This situatioR may well esist, hot this is ot the questioR. IR other 10. This criticism is of particolor impostance ohen Musgrave Ocoiders the sfforts of lar snusbers. If the model is rstricted to thse political mechanism, the problemwoflosreonmbers doessot exist intheforstateosd byMosgrave.Theost- inon osecificrsepediture-aosproposlsis doebalimitedssomberofleis- lasrersenting taxpayr cosuamers and ot by tbs taxpsecosumrs them- srlses. The problem of lbs legislao 010esprsetig alargesnumbroftapaer cnuesis o diffeen problem, and is treated is Cbopter 6. l1.Tbesthoreticaloasecssofstheopoblemoof osroroled pseferences are dis- cossed is dletail Un Chopter 3. ence of compulsion, after a quantity at a price boo been exspressed, affects the qoaotity which woold be eopressed. Mosgoave's aoalysis, howecer, is primorily in terms of lbe iodisid- ual's realiziog that his expressed demsaod will affect lbs price. This analysis is based so Liodahl's statemeot of the model (i.e., that ooein dividoal's demaod courve is lbe other iodividal's supply crse). Port of the problem, howeser, seems to he shot Mosgrave sws'lobes his anoly- sis to the isdividoal from lbs political processo10 Io his ansolysie the individual rcogniesthat his espressed demnd is going toaffect his costoond,stherefore, he willonot espress his truedemand." However, if it is remembered that the voluntary exchange model tobes place inU political settiog, at least part of Moograve's criticism coo he dropprd. 'T'he iodisidoal is ot directly bargaioiog with aoother isdividool for the exchaoge of two foods. Two groops of legislotors ore attemptiog to oh- loin the qoaotity of a good which lbs iodividools, whom she legislator represeots, swoold waest ot o price coosisteot with that qoaotity. The leg- islotor does ot hose to obtoio the lowest possible price for rarious qoootities to satisfy lbs iodicidools he represeots. All that the legislotor most obtoio is a quantity and poise relatiooship which the iodicidoals that he represents coosider satisfoctory. Therefore, is caonot beas somed that tbedemaod corves willbeoaffectedhbythe factthatsthe pokce is offected by she demaod esprewsed by the legislator. Poise cots- 001 be removed from itsorelaionship to quantity jost becoose the good osdsrocossideration is a poblic good. If the legislator is ottemptinsg to maximize the sotisfaction of those individuals whom he represeote, he most express a demaod wckh relates quastity aod price ood it wust be o quastity asd price relationship indicoted by tbs demaod cools ins lbs Liodahl model becoose tbis corce by defioitios is the sohedole of qoastities which the iodiciduals wouold wool at various prices. To ex- poems any other qoastity-price relotionship woold pot the legislaor io lbs psitioR of ot troly representiog the individoals shot pot him in office. This situations may well esist, hot this is not the qoestioR. Is other 10. This criticism is of porticulor importanse wben Mosgrave coswders the effects of large umbers. Hf lbs model is rstreictsd so she political mecbonism, tbs preof laosoe nombers doss not exsin ter loose saed by Mosgsove. Tbe sot- log on sprcific expsodisose-tos proposals is doss by a limited number of legis. lotorsreprsessing taxpoyr cosumers and sot by tbe saxasserscosumers tbem. selves. Thr problemofc the legislaor sersentinga olbar number of taxpayer cnuesis o diffrens problem, and is treosed is Choptes 6. 11.Thestheoreticaloaspecsoftheroblemof unrevealed prfeences are di- cussed is detoil is Chopter 3. 10 ence of compulsion, after a quantity at a pokce boo bees espressed, affects the qoaotity which woold be eopressed. Mosgoave's onolysis, howcever, is primarily is terme of lbe individ- ual's realizing that his expressed demand will affect lbs peice. This analysis is hosed son Liodahl's stotemeot of the model (i.e., that onein disiduol's demaod corse i's the other iodividool's sopply corse). Port of the problem, howevr, seems to be that Mosgrave switches his analy- sis to the indisiduol from the political procese.10 Io his analysis the ondividoal recogoizes that his espressed demaod is going to affect his costoond,thersfore, he willotlepress hisstruedemand." However, if it is remembered that lbs volontary exchange wodel lobes place in a political settiog, at least port of Mosgsre's critiism coo he deopped. 'The indisidual is ot directly bargaining with asother iodividoal for the exchaoge of two goods. Two groupo of legislaors ore attempting to oh- tain the qoantity of a good which the iodividools, whom she legislator represeots, woold moot ot o price coosisteot with that qoootity. The leg- islotor doss ot hose to obtoin lbs lowest posoible pokce for various quaotities to sotisfy lbs iodividoals he represeots. All thot she legislotor most obtaio is a qoaotity and price relotionship which the iodividools that he represents coosider sasisfocsory. Thesefore, is canoot he as- somedsthot thedemod cores willbe affectedby thesfactthat the poise is affected by she demaod espressed by lbe legislasor. Price can- ot he removed from its relationship to quantity jost becoose the good uoder cosideroioo is a poblic good. If lbs legislator is ottemptiog to masimize the sotisfoction of those iodividuols whom he represeots, he most express a demaod which relates quantity and poise and it most be o quantity aod price relationship iodicated by lbs demaod corve i the Lindahl model becoose tbis cr by defioition is the schedule of qoaotities which lbs iodividoalo woold wool at vrioos prices. To ex- proms aoy other qoontity-price relotionship would pot lbe legislator i the psition of ot troly represontiog lbs iodividuals shot pot him i office. This situatioo may well sxiot, hot this is ot the qoestion. Io other 10. This cricicism is of portikolor impoesonar when Musgrave osiders the effecs of largs nsohess. If she model is resicted to she politicol mechoism, tbe problem of losge nombers doessnot exst is shc laso stated by Musgrose. The vt ioo son specific expenditore-ssx psoposols is dose by o liied nomber of legis latoes reprsnting oaxpayersssomes sod ots by tbe taxpayer cosowes show- srises. The problem of tbe legislaor reprsentoing o large numbesrof tospoyr cosmr sadifferens problem, ond is treated is Chopter 6. 1. Thehricloapecsoftepolem of unreveled preferesses ore dis- cossed is detail is Chopses 3. 10  GRAPHICAL MODELS words, Musgrave's criticism although stated in terms of a theoretical criticism is more akin to a practical criticism that politicians do not perfectly represent those who put them in ofice.12 Musgrave in 1959 reconsidered his rejection of the voluntary ex- change model and came up with the same conclusions1.t This time, how- ever, his analysis was more specifically in terms of a Cournot duopoly situation. This analysis can be rejected simply because each individual is not a producer trying to obtain a favorable price for the goods he has to sell. The comments about Musgrave's earlier rejection of the the- ory still apply, but it may be good to consider further what the Cournot duopoly analysis would imply. An analogy can be made for this pur- pose. In the private economy, it would have to be assumed that a stockholder of a large company tries to get management to set its price so that the stockholder acting as a consumer can purchase a larger quan. tity of the good produced by the firm. The stockholder and consumer may be one person, but this does not mean that as a stockholder the individual tries to bargain with other individuals (stockholders) just because by so doing he can affect the price he has to pay for the good as a consumer. In the public economy the individual is a voter and a consumer. This fact, however, does not mean that the individual as a voter will bargain with other voters to affect the price he has to pay for the good as a consumer. The only concern of the individual is that he can purchase a quantity of the good at a price which maximizes his satisfaction. In the case of a private good this is accomplished by merely seeing to it that the quantity he purchases has a particular relationship to the price determined by the market or by the management. In the case of the public good this is accomplished by seeing to it that the leg- islator who represents the individual expresses a quantity and price relationship that maximizes the individual's satisfaction. Under the consideration of the voluntary exchange theory as a so- lution to the theory of tax justice, Musgrave rejects the theory because of the non-competitive nature of the political process and because of the assumption that original distribution of wealth is a "just" distribution. The former cause for rejection has been discussed and only accepted as a practical limitation to the extent that politicians do not and need 12. The theoretical issue involved in the problem is whether or not individuals do consider public goods in terms of a quantity and price relationship which maximizes satisfaction and which they expect their legislators to abide by. This issue is taken up in Chapter 3. 13. Theory of Public Finance, pp. 78.80 11 GRAPHICAL MODELS words, Musgrave's criticism although stated in terms of a theoretical criticism is more akin to a practical criticism that politicians do not perfectly represent those who put them in office.12 Musgrave in 1959 reconsidered his rejection of the voluntary ex- change model and came up with the same conclusions.1" This time, how. ever, his analysis was more specifically in terms of a Cournot duopoly situation. This analysis can be rejected simply because each individual is not a producer trying to obtain a favorable price for the goods he has to sell. The comments about Musgrave's earlier rejection of the the- ory still apply, but it may be good to consider further what the Cournot duopoly analysis would imply. An analogy can be made for this pur- pose. In the private economy, it would have to be assumed that a stockholder of a large company tries to get management to set its price so that the stockholder acting as a consumer can purchase a larger quan- tity of the good produced by the firm. The stockholder and consumer may be one person, but this does not mean that as a stockholder the individual tries to bargain with other individuals (stockholders) just because by so doing he can affect the price he has to pay for the good as a consumer. In the public economy the individual is a voter and a consumer. This fact, however, does not mean that the individual as a voter will bargain with other voters to affect the price he has to pay for the good as a consumer. The only concern of the individual is that he can purchase a quantity of the good at a price which maximizes his satisfaction. In the case of a private good this is accomplished by merely seeing to it that the quantity he purchases has a particular relationship to the price determined by the market or by the management. In the case of the public good this is accomplished by seeing to it that the leg- islator who represents the individual expresses a quantity and price relationship that maximizes the individual's satisfaction. Under the consideration of the voluntary exchange theory as a so- lution to the theory of tax justice, Musgrave rejects the theory because of the non-competitive nature of the political process and because of the assumption that original distribution of wealth is a "just" distribution. The former cause for rejection has been discussed and only accepted as a practical limitation to the extent that politicians do not and need 12. The theoretical issue involved in the problem is whether or not individuals do consider public goods in terms of a quantity and price relationship which maximizes satisfaction and which they expect their legislators to abide by. This issue is taken up in Chapter 3. 13. Theory of Public Finance, pp. 78-80 11 GRAPHICAL MODELS words, Musgrave's criticism although stated in terms of a theoretical criticism is more akin to a practical criticism that politicians do not perfectly represent those who put them in office.12 Musgrave in 1959 reconsidered his rejection of the voluntary ex- change model and came up with the same conclusions." This time, how- ever, his analysis was more specifically in terms of a Cournot duopoly situation. This analysis can be rejected simply because each individual is not a producer trying to obtain a favorable price for the goods he has to sell. The comments about Musgrave's earlier rejection of the the- ory still apply, but it may be good to consider further what the Cournot duopoly analysis would imply. An analogy can be made for this pur- pose. In the private economy, it would have to be assumed that a stockholder of a large company tries to get management to set its price so that the stockholder acting as a consumer can purchase a larger quan- tity of the good produced by the firm. The stockholder and consumer may be one person, but this does not mean that as a stockholder the individual tries to bargain with other individuals (stockholders) just because by so doing he can affect the price he has to pay for the good as a consumer. In the public economy the individual is a voter and a consumer. This fact, however, does not mean that the individual as a voter will bargain with other voters to affect the price he has to pay for the good as a consumer. The only concern of the individual is that he can purchase a quantity of the good at a price which maximizes his satisfaction. In the case of a private good this is accomplished by merely seeing to it that the quantity he purchases has a particular relationship to the price determined by the market or by the management. In the case of the public good this is accomplished by seeing to it that the leg- islator who represents the individual expresses a quantity and price relationship that maximizes the individual's satisfaction. Under the consideration of the voluntary exchange theory as a so- lution to the theory of tax justice, Musgrave rejects the theory because of the non-competitive nature of the political process and because of the assumption that original distribution of wealth is a "just" distribution. The former cause for rejection has been discussed and only accepted as a practical limitation to the extent that politicians do not and need 12. The theoretical issue involved in the problem is whether or not individuals do consider public goods in terms of a quantity and price relationship which maximizes satisfaction and which they expect their legislators to abide by. This issue is taken up in Chapter 3. 13. Theory of Public Finance, pp. 78.80  not abide by the deaires of the individurair whaot they represent. The latter carte far rejectian it roach mrae comtplexanRd Hill not hr treated here.14 HOWARD R. BOWEN Int 1943 Howeard R. Bren presented anoather formualation of the vel- untary exchange or price throry of pablir finrance, wehich trat in tertns of an individual rating pracress rather than a palitiral rating process, andtwhichrwasrprreetedrmoreralontgtherlinesof acepted prie thery analytir.tt Figure 3presentsrthe determoinationeofthe idealaoutput andcost di- tributian in termsr at real gaads. The vertical axtit meratures the quarn- lily af all ather garde eshich the individuals wouald be trilling t0 give ap tabtain scial goads,and tehrizatal aisasres theqan. lily of the racial grad desired. The individual curesof amtarginal substitutian are individaal drnmand carrel oith pricer stated io termsr at the qaantity at all ether goads that the individaal it twilling to fire up toobtainrrearsquantitie ftscial gadr.08The TMS carrelisrthe total deroand core. Becauseocrial goods are defined or those for ohich the deroand (supply)Ct7 carnalt be indiridoally held, the total deroand curersrbtainedhbyertically addirg the individual deroand carer (MS. MS1 and MS.) rather than hy horiaaelally adding thero. The intersection of the roarginal cart curve (MC)at and the total deroand crre atpoint Pdterminestthe "ideal"eotpt. Theindiidaltcot 14.Thernatare ofthetstate antr hetnratrm reimrytatfactotrsinte aeation oaxjsircec,habut ilanthbe disearerd here. Foe roe interpetrtion of the effect at the nature at rthe otate ton the aceptance at noaceceare aftrho avotaeryehange thera ee Bchana, "PreTheoraofGoveerrot Fiace." 15."Itecrprtaion at Veriag in tire Alloation at conaomic Resoarces." 16. owen's ore at mrarginal rubstitatian cotter instead oftegularly defined emrand curveslisrerettahlehecause itroay haaecontrihutedttelatrue at indiffrenrce carter. The adoption at indifferec carer by Sraulson and Mar- gooe has led to considrerable confusion ana continued rejection at the theory. The probiror drelocing teen Musrave analysir are treted or length in Chrp. 17. Rarer speabs of divisihility at demnd, er rpeaks of societ goods err he- ing divisible ino unitr that err be tire uniqae rorrersion at individalsr. The posrseion at individals refrers to the conmtin et a rupply at goods, so tret it it aerially tire iadivisibiity at sucplyrathcer thee deoand. 18.OBowenaestheconcectrthattheidlra pt exrarists wen eMC equals de. oand ifthetrduthaiconrtant or decreasingearstr buttwhenAC eqalsdemand it tire prodact her inrearing core. Bown exclains tire oethodology to the lter care at well ar the fret ro rarer, hat 00 attendt ir nade to perent rte AC de- terminatior ince MC detrmeination as till the mare widely held concept. not abide by the desires of the indiridats whom they represent. The ltter carte for rejection it roach rore cromplen and trill net be treated here." HOWRDt R. BOWEN In 1943 Howrard R. Browen presented anoether forroalation of theatol antary exchange or prie theory of public finance, wahich tree in termse of an indiridutal rating proesso rather than a political rating proene, and which traspresented rore along the liner of accepted price theary anatytit.tt Figure 3 presentstthe determoinatinof the idealroutput and cotdis- tribution interrsorf realgod.Theerticalaisoeasutres the quan. lily at all ether goods which the individuals wounld be trilling to give rp tobtainscialgod,and thehoriontal aisroeasarestlhe quan- tity of the racial goad desired. The individual cres of roarginal substitution are individual deroand corces trith pricer elated in terror of the quantity of alt ether goods that the individual it trilling to give utorobtainvarioustquantitire fscial ged.tThe TMS crre isthe total deesand carve. Beeruse racial goods are defined or there for which the deroand (eapply)1 cannot he indiridually held, the total deroand curre isbtainedhyerticaly adding the individal deroand cre (MS. MS1, and MS.) rarher than by horizorttally adding thero. The intrersectian of the roarginal cart crre (MC)"1 and the total denmand core at paint P determoines the "ideal" oatput. The individal earl 14. Thenaerofatheesate andthenatue oflmnarerimyorantfactorinthe quertion oftaxrjurtie, butill atire discussed bre. For arc intterrerio of thereffecrtoftheatuee ofthe seee onrthe acceytacerotnar-accepratanc tfthe votarayrexhagrthery,te ehaan,"PuecTherofaGaoornentinace." 15. "Iatrpreration at Voting in tire Alloeationro conomic Reroorcer." 16. owe' ore oflmriral subsaitutior carer insreard of egulrly defied demandcurver isrrettablehbecarrr itrmay havectributed tothelatrarr at indifference carter. The adoptian at indiffeece carer by Saouelron and Mar- geave hat led to considrable confusion red a continued rejection afth hreory. Tire probleor developing from Musravers analysis are treated at teetr in Chap- 17. Roen seaks at diviiility at demnd, yet spreaks at scirl trade net hr- ing diviriblc into anite thee eran be tire unique rosrersior at individalr. Tire posserrion at individualr triters to tec conrsumption at a supply of gard, ro tirat it is aerially tire indiviirility of soyply rather than deomand. t8.OBowenausesrhe concepttrat teidealtoupur enitr whenMC equals de- macd iftrheprdutbaconrtant ortdecrecasingc iosttwenaACrequlsdemand it tire codect has inreasing corer. Racer erplainr rthe mthorbdology in the larrer care at well ase rset tea crser, irut no atemptr is made to preent lire AC de- termition ier MC deteroination is rtill the more widely held concept. 12 ret abide by thc desirer at the indiriduals whom they represent. The tatter cotte fee rejection it rouch tre complext and witl net he treated here." HOWAeRD B. BOWrEN In 1943 Hooted R. Bowern presented another forroulation of threato- untary exchange or price theory of public finane, which oat in terror at an individual rating process rather than a political roling process, andewhichrwas presentedrmorrealong the linesef acepted price theory analylir.rl Figuree3 pesentsrthe dtermoinationof the idealaotlpt and cotdi- tribution in termst of real garde. The vrpica1 ante roeares the quarn- lily rf all ether goode wshich the individurals trorld be trilling to give rp tobtainrscialtgoods, ardthehorizontal axismares the qan tity af the racial goad desired. The individual curver ofroarginal sabstitation are individual deroand cres with pricer elated ire terror at thr qantity of alt ether goods that the individural it trilling to gle upltoeobainearioustquantitiesoftscil ged.1tTheTMS crerisrhe total demaned crre. Bearesocial grade ae defined or there far which the deroand (sapply)j1t cannot he individally held, the total deroand curre iscbtained byerically adding the individual deroandacres (MS. MS1 and MS.) rather than hy horiontally adding thero. The intersection of the roarginal cart crve (MC)tt and the total deroand curve at point P determoines the "idealt output. The individal reel 14.Thernate oftheesaterand tntir ro f mtanareimyoportnteectrsmnrthr ouestion ofter justice,butawillrnotire dircursed bee. For ore interprtation at the effect at the roate ti the elate ton tire acceytance or nonacceeptance of the volutayec hagetheory,tserBuaanro PreTheoyofGovernmtrt iace." 15. "Itercretotier of Vating in tire Alloercatio CfEcooic Rrsoorces." 16.Bowre' ure at mrerginal subbtitutionreseinsteadofeglarly defnd demeand curesrrr ettrable bcaure itroay haeconributed tothelatruse at indifference cotter. The adoptian at indifference curves by Saeorn and Mar- grave bar led to conidrable confurion rod a cornined rejection at the tireory. Tire probleos drevelocingaftoe Muae's analysis are treated at lengthr in Chap- 17. Boaen speaks at divisibility at dead, yet seakst at social goods net he- ing divisible intl 0unite thee coo be tire unique porsession at individal. The paseon of indiidols refers to the conrsroption at a supply at good, so thrat Ait isareaually tire indiviiiity at suope rather than deornd. it. Barer ues lire concept tirat the ideal otrput exite wiren MC equals de- mand ifthe prdct hascosat or dereasingpcostsru henb ACrequalsdemand it tire peoduct itat increalitg rot. Racer erplainr lire mthodlogy an the ltter core to well as the her ro rarer, it ro atempyt it trade to pereet tre AC de- temia ionine MC determination is still the morre weidely held concept. 12  shares aedetermined by the intterst of the vertical line at the "ideal" output adthe idiiduasldemansd sces.5 Boowen also shoot that the average total demansd (TMS/N) ansd aver- age marsginal cost (MC/N) woultd detertmine the samse "idea" output (P). The slope ofthe TMS curve and the TMS/N cureeouldnot be shars ae determsinsed by the intesectios of the vertical linse at the "ideal" otput and theidiiduasldemttatd curvess3s Boowts aso showt that the sverage total doemtnd (TMS/N) ansd aver- age tmargitnal cost (MC/N) ould deteomine the tsame "ideal" output (P). The slope of the TMS curve aod the TMS/N curve ould ntot he All Othe1 Goods or shaes see detertoined hy the itntesections of the vertical litne at the "ideal" otptadthe idiidul demantd csss'et.ls Bowen ast shoot that the overage total deosand (TMS/N) sand aves- age margitnal cost (MC/N) oustd deteromine the satte "idea" output (P). Thetlope of the TMS corve and the TMS/N curve ould ntot he All Other Goods or All Other Goods or P AC(MC) TMS K M MSo MSb MS, FACIMCI TMS K M MS0 MSb MS, l 0 X Social Good J Figue 3. the samte, hut the point of intersection wousld he the saute hecause at this poinst TMS eqas MC sod eqal ntumbes divided by the same num- ber are qual. The imortanceof tis concept can be seenin Figure 4 where Boosen assusts that the insdividsal demtand curves owill fall iats a sorosl pattern of distribtions. Assuming a tsormal disribtions, 19. Individual cost chases can be determined its this sanner only ilt is cosatcost product, becase is tbs other cases the revenue would sot equal the total cost. 13 Figure 3. the samte, hut the point of intesctiots ould he the samte hecause at this poitst TMS equals MC and eqal nsumbes divided by the saute ntum- ber areequal. The imotantceoftis concept can beseen inFigure 4 oboese Boocen assautes that the itsdividual demantd cusves oill fall into a normtal pattern of distribtios. Assuting a norutal distribution, 19. Iudividual cost shares cat he deteroined is this oanner only if it is a cntncotprodct,hbecste inthesothercsssteevenue wouldonot equal tbs total cost. 13 I 0 If Sociol Good J Figure 3. the saute, hut the point of intesvection ould be the saute because at this poit TMS equals MC and equal umubers divided by the saute umu- bersareeqal. Theimortsance oftis concept canubeseenuisFiue 4 obsere Boocts assaumes that the indicidual deutand castes owill lall inoa norutal pattern of disributions. Assuming a normtal distsibtios, 19. Individal cost shares cat be deterited is this muanner onlc illst isa constat osst product,hbccause insthctercsssthrcvenuc ousld ntequal the total cost.  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE the average equals the mode. Therefore, the modal demand curve is the same as the average demand curve and its use results in the deter- mination of the same "ideal" output as does the use of the total de- mand curve. The assumption of the normal distribution is also important in the interpretation of the voting process made by Bowen, because if each individual votes on the quantity of the service he would desire, the a 9 AC/N (MC/N) TMS/N AModa Curse) 0 X Social Good Figure 4. "ideal" output is both the output which gets exactly one-half of the votes and that which gets more votes than any other quantity. In the case of voting on various increments or decrements to a given quan- tity of a social good, the "ideal" output is the one which gets exactly one half of the votes yes and one half no. Smaller quantities will receive a greater number of yes votes than the "ideal" output. Three assumptions which are explicitly made by Bowen, and were implicit in the presentation, are important: (1) the income dis- tribution is "correct" (i.e., the income distribution has been accepted THE PRICE THEORY OF VALUE IN PUBLIC FINANCE the average equals the mode. Therefore, the modal demand curve is the same as the average demand curve and its use results in the deter- mination of the same "ideal" output as does the use of the total de- mand curve. The assumption of the normal distribution is also important in the interpretation of the voting process made by Bowen, because if each individual votes on the quantity of the service he would desire, the 9 AC/N (MG/N) TMS/N (Modal Curse) 0 X Social Good Figure 4. "ideal" output is both the output which gets exactly one-half of the votes and that which gets more votes than any other quantity. In the case of voting on various increments or decrements to a given quan- tity of a social good, the "ideal" output is the one which gets exactly one half of the votes yes and one half no. Smaller quantities will receive a greater number of yes votes than the "ideal" output. Three assumptions which are explicitly made by Bowen, and were implicit in the presentation, are important: (1) the income dis- tribution is "correct" (i.e., the income distribution has been accepted 14 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE the average equals the mode. Therefore, the modal demand curve is the same as the average demand curve and its use results in the deter. mination of the same "ideal" output as does the use of the total de- mand curve. The assumption of the normal distribution is also important in the interpretation of the voting process made by Bowen, because if each individual votes on the quantity of the service he would desire, the b TSAC/N(MC/N) TMIS/N (Modal Curse) 0 X Social Good Figure 4. "ideal" output is both the output which gets exactly one-half of the votes and that which gets more votes than any other quantity. In the case of voting on various increments or decrements to a given quan- tity of a social good, the "ideal" output is the one which gets exactly one half of the votes yes and one half no. Smaller quantities will receive a greater number of yes votes than the "ideal" output. Three assumptions which are explicitly made by Bowen, and were implicit in the presentation, are important: (1) the income dis- tribution is "correct" (i.e., the income distribution has been accepted 14  by society; this is she necessary~ assoumptios is order to ssse price theory of peivote goods los o policy eecosmssesdstioss); (2) the psodust soill be availoble equolly to oil individuals ss shot the diffesesoces is de- moand repeesesnt diffeencoes int tastes oand preferensoes rotherethass jot diffesrensin benefits (s nsoesmal cosne of disteibutiossconsot be osssumed if benefits aediffereestto eschindioiduallvoter);osnd (3) the cost of pooducisg the peoduct is vaeious qusntities is bnoson to tlhe voters and mill be divided equally among the voters. This moons tbot the voter automoticslly boms his cost (AC/N). In other moods, the voter boms his relotise shoe of the sotl eopenditore sf the mocial good. The second and shied assumptions son be modified by assming thst thome eceiving different bensfits con be grooped into closses so that the membees of eooh cloms do reeine the some benefitt5 ond tbat the oosts mill be dioteiboted ossoeding to the modol demand for ech olass bnt shot the indiniduol sod domses of indiniduols are not affeoted in theis expemed demond by she foot shot their demand offects shots owon relatine cost shose. Figuse 5 presents Homes's model.20 The relasionship betmeen the Lindahl model snd the Homen model is both interesting sod impoetant. Figuee 6s peesents soothes Homen model libe Figuso 3 and onother Lindahl model libs Figuee 1. The csenet of she Lindobl model hone bees detesmined by the curves is the Bowses model. The total eopendituee is oomputed by multiplying the quntity by the average cst (AC). The pescentage of the total expendi- toe mhish esoh indiniduol is milling to pay is computed by dividing she indiniduot's demand by the totsl cst at each possibte ostput. The output deteemined by both models in the some. The assumption that on- eoops coot is costant is essestial to she secociliation of the swo models bessuse the equilibriom of the Lindshl model mill oscur st the ousput do- termined by the intesections of sveesge cst and the total demand coons is the Bomes model. Another oasmption wohich it nesesosy in the rec- onciliation ofsthetwo models isttthe Als ndHBSsuevesof Figurel1 must be tabeo sdemand cusnes oftmo individualsesatherthan oftwo geous of legislators. This is the inteepeetstion of she Lindohl model sed by Musgeoce, hot it igorees Lindahl's sonsiderstion of output being 20. Ansampleoonhe mde ofducaionhere oesolss of peopleshaveno shildres sod she oshersclooms can he lissed by she nombee of childreo pee fsmily. Under these conditioos, each olassifioosion of people can ho assomed to hose she some benefit sod, thesefoe, it csn reasmosably ho assumed shot within esch classi- ficstion, tosses sod prefeencesowillsvary in scordanceswith s oromaldistibotio. 20. Bosses's model does sot detesmine she tax-peioe. Is is given by the MC/N coressmomed forseachlss. 15 by sosiety; this is thesneessery assumption in ordee to se peice theory of peinats goods foesa polisy recommendation) ; (2) the psodoct mill be ovsilable equally to oil indiniduals so shot the diffesences is do- mood epeesent diffeences is tsts sod preferences esthee than just diffesences in benefits (a normal omre of disteibutionscoonot be smumed if benefitssaediffeeentstoeschbindividual votee)(;and (3) thescost of psoducing the peoduot is nsrious quantities is boms to the notsers sod soill be divided eqoslly among the notsers. This measo thas the notee automaticslly boms his cs (AC/N). Is othes moeds, the noter boms his relatice oseae of the tots1 expenditoe of the oial good. The second sod shied ssumptionssca be modified by assoming shot thome eceivng difserent beeits 00n he geouped into elsses so shot the members of each clasm do seceine the some benefit2t sod thot the costs mill he disteibuted occoeding so the modol demand foe eacb class hot shot the indinidual sod domses of indinidoals see sot affeoted in theirepessmd demond by thsofactthat theirdemandoffectsotheiromn relativc st oseae. Figose 3 peents Romeo's model.25 The relationobip betmeen the Lindahl model sod the Homes model is both interesting sod impoetant. Figure 6i peesents anosbee Homes model like Figure 3 sod soothes Lindabl model liks Figuee 1. The cuenes of the Lindahl model hone bees determined by the euenes is the Romeo model. The toss1 eopendituee is composed by molsiplying the quantity by the aceeage cost (AC). The perentage of the tots1 eopendi- tuee mhich each indinidual is milling to pay is composed by dividing the individoal's demaod by the total cost ot sach pomible outputL The output deteemined by both models is the some. The ossumption tbos av- erage coot is ostants is emsential so tbe eeconsiliotion of lbs sins models because the equilibriom of she Lindahl model mill ocoos at lbs outpot de- teemined by the inteesections of aveeage cst sod the total demandocre is the Homes model. Anothee asmumptios wohioh is necssary is the rec- onciliation of the two models is shot the AR sod HiS curve of Figores mustbe tkens demand cuenes of twoindividoalserathersthan oftmo geroups of legislators. This is the intepsetation of she Lindahl model used by Mosgeone, hot it igores Lindahl's consideeation of output being 20. Anexampleocanobemdeofeducaionhere oneolss ofeople haveo childsen sod she osher otosses can ho listed by she nomher of childeo pee bamily. Under these cooditions, esch classifisotion of people can he assoumed so hose she some beneit sod, shesefore, it con resonably be ssomed shot oithin each slomi. icstion,tastesad pefeeoes oillvaey inoaoordanceowithsasoml distibtio. 21. Boocn's model doss not detsrmine ths sos-poise. Is is given by the MC/N coee asmedforoeach clss. 15 by moiety; this is the necessery assumption in oedee to se prise theory of peivategoods foreapoliyeommendtion)(; (2) the productmill be available eqoally to oll individuals so shot she differenoes is de- mood epeesent diffeencees is tastms sod prefeencses eathee thas jst dfeences in benefits (a normal omre of disteibutionscannot be smumed ifhoeneitsare diffesentstoeach individual voter)(;nd (3) thescost of producing the peodut invaeioosoquantitimsiskototenotes sod mill he divided equally omong she notsers. This means shot the notser automatioally boms his cst (AC/N). Is othee moeds, the notes boms his relativeoseae of she toss1 expenditoe of the mocial good. The seond sod shied assumptions can be modified by assoming shot thome eceining diffeeent benefits 000 he geomped lot o classes so that the membees of each slots do receive the some benefitm sod that the soss mill he distributed oscoeding to the modal demand foe eacb class hot that the indinidual sod olasses of individuls see not affected in their expemed demand by the foist shot their demand affects their tin elative cost shoe. Figoe 3 presests Romeo's model.0 The relasioshbip betmween she Lindahl model asd the Homes model is both intersting sod impoetant. Figue is peesents anothee Homes model libe Figuse 3 sod asother Lindabl model libe Figoe 1. The cuenes of the Lindahl model hone bees deteemined by tbs curnes ins the Homes model. The toss1 expendituee is sompoted by multiplying the quantity by the aveeage cst (AC). The perentogs of she tots1 expendi- toe mhich eash individual is millisg to pay is composed by dividing she individual's demand by the total cost at each pomible outputL The output deteemincd by both models is she some. The assumption shot on- erage cst is costant is ssential to the econciliation of the tins models become the equilibriom of the Lindahl model mill occur at tbs output de- teemined by the inteesections of acerage eonst sod the totsl demandcuv in the Romeo model. Aoothee asmomption mhich is necessery is the rec- onciliation of she sins models is shot the AR sod HiS coenes of Figmre 1 mustsbestakenas demand sornes ofmwo individualserathethan of two groups of legiolators. This is the inteepretation of the Lindahl model osed by Musgeave, hot it ignoses Lindahl's cosideration of outpus being 20. Anexamplescanhe mde ofedctionhee oneslass oftpeoplebhavetn childes sod she ther classes can be listed by she nombes of ohildens pee fomily. Under those onoditions, eaoh classification of peopleocan be ssumed so hsve she some beneit sod, therefore, is coo reaonobly he assumed thot wishin eaoh clstoo- iootionttases asd prefeeces willvary inaccordanceowithasneml distibio. 21. Boost's model does not determine she too-poise Is is gives by the MG/N curvessumed foreachslss.  determined iR parliamoent. If the Lindahl mtodel is interpreted t0 he lwE groups of legislators repeenting two classes of indiciduals inociety, it would be stecestary 10 Rassute that all individuals in each clats have the same demand ftunction or that all individoal demtands are vertically added, and the iodividual c0s1 shares are determoined by the modal or average demadof theparticular casses of society. The modalocurves astdeveloped by Bowen inoFigure 5oanot beoued toeonile he to ClaIss I MC/N (I) r,(Classail '5 MC/N 0 X Social Good Figure 5. mnodels because Bowcen has started woith a given per-unit cost ftor each 010ss of society. To look at it another stay, the reconciliation requires 100 assumptions: (1) the individttal detmaod 000000 are n01 affected by the fact that the exipressed deotand affects the relative cotshares of the iodividoalo; aod (2) the legislatoes have perectly tmeastteda the total deotantd function of all indiciduals of society 0r the moodal dotoand functioR of the inidividuals swhioh the particular geoop of legislators Bowenos article alto brings to tight severol other points of interest to the price theory of poblic finanoce. One point relates to the quantitative determined in parlioament. If the Lindahl muodel it interpreted to be to groopo of legitlators repetentinsg two olases of individualsnsocety, it swoold he neoessory to assoute that all individuals in each class hose the samte demoand fosotion or that all individoal demando are vertically added, and the iodividual ost shares are detrmtined by the tmodal or average demand of the partiolar clases ofocoiety. Thettmodal crves as developed byBowen intFigure5oannot be sed toeoooile theto Class I MC/N - ----MC/N(II) 0 X Social Good Figare 5. mtodels because Botwen has started wcith a given per-unit ost for each class of society. To lobk at it another way, the reconciliation requires two assumptions: (t) the iodividoal demoaod curvet ore 001 affeoted by the factthat the expreesed deoandoaffectttheerelative costdsarestof the individoals; and (2) the legislatort have perfectly measored the total demoand function of all individualt of society or the moodal demand fonction of the individuals which the particular group of lefislators represent. Bowen's article aloo brinogs to light severol other point of inaterest to the price theoey of poblic finance. One point relates to the quantitatioe 16 determined in parliamnt. If the Lindohl model it inteepeeted to be two groups of legislators represeting two clasoeo of individoalo in society, it would he necessary to assome that all individuals int each clots hove the stone dentond function oe that all individual demnsods are sertically added, and the iodividual coot thaes aee detcermined by the modal or overage denmand of the porticolor classes of society. The modal carves as developed by Bowen intFigure 5canonot be sed toeconcile the two Class I * MC/N II ('5-Class l~ P MC/N 0 X Social Goad Figurr 5. models becaue Boswen hasstarted withoagiven per-unit cotfor eah olass of society. To look at it another way, the reconciliation reqoires two assumptions: (t) the iodividoal demand curves ore not affected hy the fact that the eressed demaod affects the relative coot shares of the individuals; ond (2) the legislators hove perfectly measured the total demand fonction of all iodicidoals of society or the modal demond function of the indiciduals which the particular geoup of legislators represent. Boments article alto brings to light several other points of interest to the pcice theoey of poblic fisance. One point relates to the quantitative 16  maementsof social goods. Boe makes the point that some soscial goods like eduction canot ho moasurd in simple physical units of vouelime, or sooight. Education cosis of buildings, equipment, numbher of teachers, quality of tecohers, etc.2t Each of these components measueent of social goods. Bowoen maokes the pojint that some mossal goods like education ca001not bemeasured in simople physical unit0s of volume, lime, or weoight. Education consists of buildings, equipment, number of teachers, quality of teachers, etc.22 Each of these components measurement of social goods. Bosoen makes the point thatonome sooial goods like education caossot ho measured in simple physicul units of vouelime, or sweight. Edouaion consists of buildings, equipment, number of teachers, quality of teachers, eco.05 Each of these components 78 9 0o u Sociul Good Total Expendituee Lindahl Model Total Enpenditure Social Good A Social Good 64 -6 56 5H 40 -4 24 2 16 -16 a I -2 4 6 8 0 s 13 Buwen Model 8 AC(MC) 64-6 56-5 40-4 24 M -24 56 516 48 48- A-0 10 20 30 40 ,00 90 80 70 60 0 60 O BO 90 100 50 40 30 20 10 0-8 A-0 10 O 30 40 100 90 80 70 60 V 6V 10 80 9V IVV 50 40 30 20 10 O-B Figore 6. 22. Lindahl'soncept of voting onll eoomsicallyrelated goodsat oeltimc moo bc intecpceted to mean thc soc 1thi0g, oc it mcy be takn to meoo goods relatedbyltastes and proefeenes. Ineitherocse, Msgrave's criticisms ofLindahl, hased onothe onceplthat llgoodsowhichoareocpable ofbing determined by Ihe benefit principle are lumped together in oce vote, ar ot alid. 17 Figore 6. 22. Lindahl'sonocept of votinonllcoomically related oods at one time moo ho interpeted to m000 the same thing, oc it moo ho takes to mean oods relatedlbytastesocnd preferencs. Incither case, Musgravesciticisms of Indhl, hased onotheconceptthatiall goodsowhich are cpableof being deermined by Ike benofit prisoiple are looped togother in one vote, are 001 solid. 17 IA-.0 10 20 3 0 40 o 60 0 80 90 1 00 100 50 80 70 60 50 40 30 20 10 0-8j Figooe 6. 22. Lindahl'sbconcept of oing onleoomicallyrelated goodes a netm moy ho interpreted so moan the snme thin, Cc it moo ho taken to moan goods reloted by 10stes and prefereoce. In eithercase, Mosgrove's criticisms of Lindahl, hased on the oncsept that ll goodsohichtare capableofheingdeterminedhby the benefit principle ace lomped together in one vote, ar ot valolid.  of eduREatioR ERR be measred astseparate goodsand the theoyopplied tR ec. This, howcevee, woold oniy be realiotic fop o large items like busildings. Howee,toeBoenetbis doesnotre o ut the use of tetheoy for eduscatioR as o whbole. Quanstity PER be Rmeasured by totol expendi- tres oR educottios if it is ossumsed thot the sotees hose knoewledge of OR eoisting list of peioeities.0t Io othee wcoeds, if the soters bnow, or beforebond estoblish, the oedee iR wchich expenditures soll be matde o lbs copoent poets of edocotioo, the qoontity of educatioR can be moeosoeed io teetos of tbe total expenditoee to be maode on education. These considerations ofeduocationoemode byfBoen epoint out tepob- lees of Rot carrying oot tbe conept of tbe peice tbeocy of poblio finate to its logicol conclosioos. Boildinfs, teochees, eqoipeet, etc.,arre sooeoes used to peoduce o product-education. Tbe allocation of these resooecesbsoold be hosed opon the leost-cost disteibotion of resources oand not the demantd of individuols. Edocation mustt be esoroed ie teeros of levels of knowcledge attained. In otbee weeds, the qoontity of edocatotn scbicb indisidools comtpaee switb theie coot is ottewptieg to maoosittite theie sotitfactione is o qooantity in teesos of tbe lecel of eduecations (eigbth geode, bigb scbool, college degeee, etc.) scbich iedi- vidoals soant tbe goveernment to sopply. It is cleoe shot lesels of edueca- tios oed lecels of knowledfe ae sot the saeme thing, esee if the fuectioe of edocotion is to peoside bowsledge, hot t is resonable to ossoume thot indicidutolo in or society do esroe edocotion in teerts of lecels of edocatios. Anothe impotantlcocept discssed by Boweistheolernativesto votiog. Recogniziog thot the isdividool votinf pcocess is not proctical for any unit of goceeenment laegee thon thot which caR opeeate one townR-Rmeeting bosis, Bocen sueggests the Roe by public officiols of polls ofeoandom samples ofsociety.lfopepllisbsedson arepeesentatice samople of the populotion and if the questions are pot iR the sawe way aif the entire citizeery were voting, the cesRlts coold bc inteepreted in exoctly the some woy [as the cote of oft the people]."009 Bowee is qoick to odd that it woold be cecessoey thot those polled be Hellin formed oR the iwsue and be responsible citizens with a knowledge thot theie choices will influence policy. These two conditions mifht be dif- hfiut to mteet and still hose aoeepeesentotice sawple of the entiee sotiop 23. Tbc concept a imracse of establishing o lit of prioeities inependi- tu a deeloped by Coil Sos; possee grvead Pecck, pp. t77-89, fee tronsltin oapart ofSax, Dieeetus0teoeie derSeer (19201. 24. Bowen, p. 43. of education cots be measurped as sepaeate goodsand the theoryoapplied to each. This, howesee, wosuld only be peolistic foe a loege itew like buildings. Howee, to Bowe this doesotruleot thetuseeofttheteoy foe educatioR 05 a whole. Quantity can be measred by totol eopeedi- toet on edocatioR if it is ossoumed that the votcers hose knowledge Rf Rn existing list of peieeities.05 IR othee weeds, if the voers hseow, r beforehasd estoblish, the ordee is which expesditures will be wode oR the component poets of edocatioR, the qoostity of edocotios coo be smeasoeed is teesms of the total expendituee to be wode oR edocation. Theeconsiderations of educatios made by BoweR peot out the peob- few of sot carrying out the concept of the price theocy of poblic finance to its logieR1 conclosioss. Boildiofs, teochees, eqoipent, etc.,arre sources osed to peoduce o pecdoct--edocation. The allocatios of these esources thould be hosed uon the leaRt-cost disteibotioo of pesoerces and set the demaod of individoals. Edocation wost be measured in teetos of levels of ksowledge ottoined. Io othec weeds, the qoostity of education which indisidools comopaee with their cost is attempting to wosimize theie satisfaction is o quantity is teews of the level of edocotios (eighth geode, high school, college degeee, etc.) which indi- vidools waot the goeenet to sopply. It is cleae thot levels of edoco- ties and lecels of knowledge re set the some thing, esensif the fosction of edocotion is to peoside knowledge, hot tit is reassoble to ossowe that indisiduals is our society do weaosope educatios is teews of levels of edocation. Asotheeiwpoctant cocept discuoed byBowes is thelternotives to eotiog. fRecegsioing that the individool coting pcocess it sot prctical fee osy onit of goveeswent largee thao that which coo opeeate os o town-meeting basis, Boocen soggests the use by poblic officials of polls oferandom samples of sociey."Ifoappll ishbsedo oe epeesestative samople of the population and if the qoestioss re yet is the saome way os ithe police citioeney weee voting, the resolts cold he loteepeeted is exactly the soame woy [os the cole of oll the people].004 Hoops is quick to odd thot it would be oecessaey thot thosc polled be well is- foemed on the issue aod be responsible citiens with a kowledge that theie choices will iofloence policy. These to coditios wight be dif- hicolt to meet ood still hove o eepremsetatice sample of the pollee voting 23. Tbe concept and imortance of establishing a it of peioiieeineopendi troea developed by Coil Sax; ee Musgrave aod Peacoek, pp. t77-89, foe translatoniofoaparofSa,Dieertugsteoie deStee (1929). 20. Bown, p. 43. 18 of eduocation coo be mseosueed as sepaeate goodssnd the theoeyoappled to eoch. This, howecee, woold Rely be eolistic foe a loege items like boildings. However, to BoweR this does set role out the ose of the theory foe edocotion as a whole. Qoontity coo be mseosored by tooal eopendi- toees cn edocotion if illis assomed thot the voters hove hnowledge of an existing list of peioeilies.25 Is othee weeds, if the voters kow, or befoeehand establish, the oedee is which expendituees will be msode on the comsponent poets of edocation, the quantity of edocotion coo be measured is teems of the total expenditue to be mode on education. Theecosiderations of edocation maode by Bowen point out she peob- lees of sot caeeying sout the concepteof the peice theory of public hooonce to its logicol conclusioos. Buildiogs, teochees, eqoipmeot, etc., are pp- sources osed to peoduce o prodoct-edocation. The allocation of these esoerces shoold be hosed opon the least-ceo distrihotion of resoerces and sot the demand of individuals. Edocation wost be measored is teems of levels of bowledge ottoined. Io othee weeds, the qoontity of education which indisiduols comspare with their cool is attempting to wosximiee theie sotisfoction is a qoantity is teems of the level of edocotion (eighth grade, high school, college degeee, etc.) which indi- vidoals watnt the goereenset to supply. It is clear that levels of educo- ties and levels of knowledge ore sot the some thiog, eson if the fonction of edocotion is so peovide knowledge, buost ls eaossoble to ossome that individuls is oue society do meosore education 10 tepess of levels of educatio. Anothee importat conceptdiswussed byBoweneis theoltentives to vcoting. Recogssizing that the indieiduol votisg peocess is ot peacticsl foe aoyounitof geeement laegeethanothatwhich canoperateeo town-meetiog bosis, BoweR soggests the use by public officiols of polls oferandom samplsof sciety."Ifoapll is baedo oe epeentative sample of the population and if the qoestions ope pot io the some way aif the polliop citizenry weee voting, the results cold he issteepeeted 10 exactly she some way [Re the vote of oll she people]."2t Boops is quick to odd shot it would be necessary thot those polled he wellin foemedothe issuesdbeespossible ciiess withoahkowledge that theie choices will inloence policy. These two cooditions mifht be dif- hicult to meet and still hove o repeseototice somple of the entiee sotiog 23. The concept and ompoesonce of stabtishing a list of peioritiee inepndi. sues oHs deseloped by Emil Sos; see Musgrave osd Peacock, cc. 177-89, fee oraslatiosof apat ofSa, DiePetungteoie dereer (1929). 24. Bowpo, p. 43. 18  public, but it is u sturt is tbs directiuo of findiug a meuns by whicb tbe political process (tbat in oil moodeso societiss moust mobs tbs ulti- mutt decision us to whbat and bowo much of social goods are to be pro- duced by tbo goveornmsot) coo ascsrtainutbe iodividual demaod for social goods.3 MILTON Z. KAF-OGLIS Is t1962 Miltoo Z. Kafoglisas added to tbe stocb of tbeosetical mod- ols whbich scere selated bach to tbe origioal Lindahl mudel?' Kufoglis' formulation makes use of a derisation of net demand curses for suck iodividual based us tbe individual's recogoition tbat tbe coosumptiou of tbe sociol goods by otber indisiduals gives bim a "woindfall" of out- isfaction. Kafogissrelatesbhisoet demand cusse model totbe concspt of"ost of servicepricing" and thetowenvetical summtionoof dmaod curse model05 to the concept of "caue of sessics pricing."29 To Kafoglis tbs "cost of service" concept iosolvs a bosionotal summation of adjusted (net) demand cusses toarrivesatthecollective demand. Thepe-uit tas-psice paid is tbe same to all indisiduals, as iu lbs outse of psisate goods switbout price discsimination. The taxpayes-consumes adjusts bis consumption accordiog to bis adjusted (oet) demand curse. Ths "solos ofsesvics" coocept, uingasssrical summationsofdmaodcusss,ss- sults is differeot pr-unit tas-prices bsiog paid by diffseet insdividuals, but with oil insdividuals conosuming tbs same uoits of productioo. The total coot to socb indisidual and total production is sbhswn by Kafoglis 25. The functicn of pressure groupr is the msadrn democratic stats may be soewhat siomilar to the process of polling a segment of the ecoomoy, if certain asumptionsaesmadecaboutehenature ofthe esueoupaedthe exet of ifufenccowhich she presue arous have is thr political process. More Digl he raid shoot psessure goucas is Chaptec 4. 26. Welfrjse Economis stnd Saisidy Psograms. Oshes msodels of recest years are is Buchanan, "Pots Theory at Govermment Finance,' p. 496; Saouelsone "Diagratowatic Esposion of a Theory of Pshlic Espendisses, p. 350; Tiehost, "Pue Theory of Local Ependitures, e. 416. The Samuselsons model teas used as a criticiasm of the volunsasy eschange approach so puhlio fiuance, uod is reviewed inoChaper eesin) to he exscnt thas Musgraveosedit as ameans ofee- seotiog a coopehesise rsview and criticism of the theory. 27. Relsted so she Lindahl model if she latter is inteepeesed as a model of undividal equoilihrium cather thas ooe ci political equitihtium. 28. Kaofoglis poor the Boweo model is terms at ordinary demand curs rashes thanmaeginaltshstitution cores. 29. E. Seligmat, Studies is Poilis Pirate, ppe 182-90, set forth she dissines- sioshbeswens "cosst ofscrcice pricig"ande"aluectf sc eicpriciue,"srling ohs former to she protection, sod rhe lasoer to the hecoefisvheory sf taxasios. 19 public, but it is a start is lbs direction of fioding a means by swbicb tbs political process (that is all moe soe'ties must make she ulti- mate decision so what and how much of social goods are to be pro- duced by the govrnoment) saascertain the inadividual demand for social gosds.25 MILTOs Z. KAFOGLIO to 1962 Milton Z. Kafoglisar added to she slobk of tkesretical mud- els whicb were elated back Is tbs origioal Lindahl model.2t Kafoglis' formulation makues use of a derivation of oret dremand curs for suck iodividual bated us the iodisiduales recogoitiss that tbs consumption of she social goods by other iudividuals glees him a "wmiudfll"e of sat- isfactison. Kafsglis relates his oet demand curse model to lbs concept of "csst oftservice priciog" andlbt eswesvrticaltsummationof demad curse model2a to the coocept of "solos of service prisiogeas1 To Kafoglis the "costsof sericeconcept insolvsakorizotalummationsfudjused (set) demand curses to arrive at the collectise demand. The per-ount las-price paid is ths same to all individuals, as is tbs outse of priests goods without price discrimioatios. The taxpayer-onsumer adjusts bis csonsumption according to his adjusted (set) demand cure. The "solar ofosrvsice"coceptuigaeertical summtionsof demand curses, re- suhts is different per-sunit tas-prices being paid by differenssidiiduals, hut witb all individuals consuming lbe sans usits of productios. The total cost so rack isdividual sod total production is shows by Kafoglis 25. Thefunctionsof pressue groops is the modern democratic cstst msyhbe somewhat similar so she erocess of eollino a segment of ehe economy, if certain asumptionssaremadeahoutrheuatue of the pessuregropssndrthe exet of influeocecwhich the pressure gouops hose is the political process. Mere mill he said ahoot pressere groops is Chapter 4. 26. W~elfae Ecoomics asd Subsidy Psogramte. Other models of rocust yeas use is Buchanan, "Poe Thery of Govenmynt Pinance," p. 4h; Sauselson, "Diagrammatic Exposion of a Theory of Puhlic Pxpedissree,' p. 350; Tiehout, "PureeTheorsof Localpoedits," p.41. TheSamlsonomodelowssed as criticism of te voluntary echange approach so puhlic finance, sod is reviewed inuChapes3lhreis)ltothe exent thatsMssgaeused i ssameassflpe. sentiog a comprehcsive review sod criiism of the thecey. 27. Related to she Lindahl model if rho sateer is inereted s a model sf isdividsal eqoilihrism rather thou see of polisical eqoitihrium. 28. Kafoglis putsthe Boowmodl inerms ofodiary demand curessrather thanomaroinaltrohsitosisonocure. 29. P. Seligman, Soudis is Public Pitasce, pp. 181.90, set forth the dirtinc. tionshetween "costsof srvice pricig"andoo"val ofseviccpiciu,crlating the fomer o the protection, sod she laoter so she henefit, theory of taxatios. 19 public, but it is a start is the directios of finding a meass by whisk the political process (that is all modlern sscieties mist make lbe ulti- mate decision us ts what and how muck of social goods use to be pro- duced by she government) coo ascertais lbs individal demand for social goods.25 MILTON Z. KAPOGLIS Is 1962 Miltsn Z. Kafoglisre added to lbs stock of theoretical mod- els which were related hack to she original Liodahl model2t Kafsglis formulation maker use of a derivation of set demand curses for sock iodividual based son the iodividual's rcogoition that lbs consumptius of Ike social goods by othes indisiduals glees him a "swindfll" of sat- isfaction- Kafoglis relates his ort demand curse model to lbs concept of "cuss of service pricing"andlbheBowenroetical summationsof demand curse modeus to the csoept of "solos of tservice priofogeas9 To Kafoglis the "cst of service" concept iovolves a horizontal surmmation of adjusted (set) demaod corvs to arsive atlthe collective demand. The per-unit tao-price paid is lbestame Is all hndivtiduals, solo she cutse of privsts goods wilbout price discrimination. The taxspayer-cosumer adjusts his coosumption aocording to his adjusted (set) demand cure. The "solos of service" concept, uingua eticloummationsof demaod cures, r- sults is different per-urit taxspriceshbeing paid by different individuals, but wish all iodisiduals coosuming lbe roams units of produrtio. The total cost to each iodisidul aod total prodactison is shows by Kafoglis 25. Thesfunctionof pressue gcoops in the modern democraticstt may hr someohat similar as she poess of polling a rsment of the economy, if certain ssumptions aremadeahoutetheatoure ofthe peressegouprs adhe exent of influenceowhich she prsure grous hatr io she political process. Moe mill he said ahoot preruse groups is Chapter 4. 26. Wfslae Economsics sod Subsidy Psogram. Other models of reseat years oce is Buchanan, "Pure Theory of Govemen Pinance," p. 496; Samoelson, "Diagrammatic Esposition ot a Theory of Puhlic Expenditues," p. 350; Tiehout, "PureThery ofocl Epditues," p.416. TheSamuelsnmodelwas useds a criticism of she voluntary exchosge spprosch so pubhic finace, and is reeed io Chsptere3lherein)ltotheuextehat Mugraveused ioassameanssofe- seoting a comprehessive revsiew sod criticism of the theory. 27. Related to the Lindstd model if the looser is interpreted as a model of individual eqoilihrium rather thou one of political eqoilihrium. 28. Kafoglisputs thesBowenmodel insctesof ordinay demand caster roathee thanmarginal suhsittioncuroes. 29. P. Seligman, Studies is Pulic Pinance, pp. 182-90, see forth the distinc- tOoshbetween"costeofrcrvicerpicing" and vaueofsestoke pricier,"rlaing ohs former to she protection, sod the latter ts the benefit, theorp of taxation.  to bo the sume iR either case." Therefore, iE followrs that the Eel do- mnod ouove analysis can beapplied where theocil good ivolves joint satisfactiosn but individual consumoption, sohile the vertical sm maotion of demuand curve analyoio m000t ho applied wohere the social good hos joint consumoption (joint supply). The derivatioo of tho Ret demanod corve makes usse of indifference curve analysis and income consumopion linbo whioh are 0 famuiliar pool of accoptod prioo thory analysis. Figure 7 presents the indiffooooco All Other Goods KK All Other Goods KKI Indioidual A lo Idioidual B K0k KK IC Ct-C - - - -st, - -- dI O IO 1~ p oC% R Z Rl Goo Scc Good th 02ifato Orie frq Ot g 0e q elit f the qocil goo 02R ompd by tho firondividal, orndB bye rocess wtboth idjstmenequilibriu position before the recognition of "wiudfull" satiofactiou. Assumiog E. io the original equilibrium combination for A south income level LL, and e, for B with income level 11, the firstostep of adjustmeut tabes place wheu A realieu that he has derived satisfaction from the quantity qpurchased by B aswll asthe atisfationderied foom his owcn purchame of Q quntity of the social good. This additioual 30. Kafoglis'proofof thispoint isbsed oo theoostant marginalcost model of Bowenuand asimplified versiouofthe net demand curederived indetil THtE PRICE THEORY OP VALUE IN PUBLIC FINANCE to be lbe esume iu either cuoe.10 Therefore, it follows that the net de- maud carve analysis can be applied where the sooial good involves joint satisfaotiou hut individual consumption, while the vertioal sum- mation of demand curve anulysis must be applied where the social good has joist consumption (joint supply). The derivation of the net demand curve mobkes use of indiffereuce curve auulysis uud income cousumption hume which are a fumiliur purl ofuaccepted price theoryunlysis. Figure 7pesents the indifference All Other Goods J55K All Other Goods KKI Indioidual A KK Individal B a 001IC d 0 l 00 I l C z--------0 K C-C 0 02 of0 q1 Otq 0 of q2 q e0l OtO Social Good Social Good Fiure 7. soups of two individuals, A and B. The process of adjustment ean he mode by starting with either iudividual seekiug eqoilibrium without the knowledge shot the conumsption of the other indicidual will affeot the satisfaction dericed from. any given quantity of the social good con- sumed by the first iudividual, or by starting with bath iu an equilibrium position before the recoguition of "windfall" satisfaction. Assumiog E. is the original equilibrium combination for A with income level LL, and eafor Bwith income level B, the first step of adjustment tubes place when A reulies that he has derived satisfaction from the quantity q purchased by B as well as the satisfaction derived from his oswn porchase of Q quantity of the social good. This additional 30. Kaoglis' pemof of this point is bused on the constant marginal cost model of Bowen ad a simplifid version of the set demand curoe derived in detail 20 to be the sume in either comm~s Therefore, it follows that the net de- mand curve analysis can be applied where the social good involves joint satisfaction but individual consumptio, while the vertical sum- mation of demand curve analysis must be applied where the social good hus joint consumption (joint supply). The deivation of the net demand curve makes nse of indifference curve anulysis and income consumption hume which are a familiur part ofuaccepted price therynalyis. Figure 7presents the idiference All Other Goods KK All Other Goods KKI Indioidal A le Idividal B 0, G Z ----)--- dSotiu Go Socil cco Plo 7. thSaifcindrvdfoan Gon qatyofheSocial Good cn smed by tefrt ihte individual b sekinghbtia equilibriumhu position before the recognition of "windfall" satisfuction. Aooumoing E. is the original equilibrium combination for A with income level LL, and e. for B with income level B1, the first step of adjustment tubes place when A realizes that he has derived satisfaction from the quantity q purchased by B as well asothe satisfaction derived from his own purchase of Q quantity of the social good. This additional 30. Kafoglis' root of tbis roint is based on the costasnt margnal cost model of Bowen adoasiplified oersiosotheunetdemaud coroederived indetil 20  satisfaction experienced by A results ins a lowerinsg of A's marginal rate of substitution for thess ooial good. Graphically this ocan hr pre. srentdby indicating thelevel ofoatisfaction received by A (S =Q +I q). At this moarginal rats of substittions A wrould warnt R comobina- tions of goods if he had Is incomne. Sinces he doss riot haveo this level of income, A will adjust his purchases to comohinationt T ansd take Q2 quantity of the social good instead of quantity Q. Individual B thess recogsizoes that he received satisfaction from Ats purchase of quantity Q2 of the social good. Therefore, B's msarginsal rate of substitutions for All Other Goods Indioidal A MrC Itdifference Map 0 0~00, G SoilGr Collectioe Demand Net P3 _- ____ H(---- -- i j O o Euu 0 Sia Goo satisfaction experienced by A resualts its a loswerintg of A's maarginsal rats of substitution for the social good. Graphically this oans hr pro- monted by indicatinsg the Irvel of ootiofaction received by A (S =Q +I q). At this marginral rats of substitations A wcould wanat R combina- ticon of goodo if he had Ii isncome. Sioce he dart oathave this Ievel of incoome, A wtill adjust his purchses to combinsation T and take Q,, quanstity of the mocl good instead of qanstity Q. Issdividual B then recogntizs that he received satisfaction from A's purchase of qusantity Q2 of the soial good. Therefore, B's margioal rate of substitutions for All Other Goods $ Individual A Collective Demsnd Net NCIdfeec a IG P° --- ------------H ceo' I Soia Goo Sit Goo Figase 0 the ocilgod i redcedan how hypsiton . GversB'tissomesve Theefre A p mas i 0oa i oomtc of th ofia god0 o i odrorca SoiailhrGmoo i nwth'p hSrociaqaaoo- tiyshe social good. Thisdce at howrpsrio als. thve Bstisfctone oh.e 1o1e hy B.l Beuc mas puhseofrr h mo scalhe god utom2ro qTi hnesul howevrho adjctmthe potesfctisnthe essinciohmenpuofhaoesqwer- baseduo B'so~sumptiorguatityrvqofhocrioa go o'mrinal which ifsstetsutsfion froi goodqa beensineast bit B'stonl iroe, utices i consumption curve.ca godt Ui tiyothe starilgonoe leelas beton howeverd ander the prtifaon eaed taied y B B ust threfremak anthe adust 2nt satisfaction experienced by A results in a lowering of A's marginal rate of suhstitution for the somia good. Graphically this cas he pe. rooted by iodicating the level of satiofaction received hy A (S = Q + q). At tkit marginal rate of substitutions A would want R combina- tios of goodo if he had I, income. Since hr doem not have this level of income, A will adjuot his purchaser to combirsation T and take Qa quantity of the tocial good irsotead of quantity Q. Irsdividual B thens recognires that hr received satisfaction from A's purchatse of quantity Q2 of the social good. Therefore, B's margisal rate of substitution fur All Other Goods $ Individual A Collective Demarnd. Net NCIdfeec a J P - 'I p'2 ~ CON It' 0 0'0'u. Q oo 0 Qf Oh0 O~ -Q Sotial GodSucis Good Figure 0. the social good in reduced as shown by positiont. Given B's income level 11, he will reduce his purchases of the social good to q2 from q. This chaoge, howeer, offsects the satiofaction of A tince A's purchasrs were hosed on B's osumptions of quantity q of the tocial good. A'o marginal ruts of substitutios for social goodo hoc keen increased hy B's action. Therefore, A moot increawe his cosumption of the social good to U in order to reach an eqailibrium consistent with B's purchaose of q2 quan- tity of the social good. This action, however, alters rho satiofaction oh. tained by B. B most, therefore, make another adjuotment. The retult of tho adjuttment protest is the establishment of an equsi. librium atEforA and of or B.The levlof saisfaction for B isrr which is the satisfaction from Qi and q consistent with B's original income consumption curve. The starring income level can hr changed and the proten repeated. Figure 0. the social good is reduced as shown by positionts. GivenB's income level 11, he will reduce his purchases of the social good to qa from q. This change, howeover, affects the oatiofaction of A since A's purchases were based on B's consumption of quantity q of the social good. A's marginal rtersof substitution for social goodohasbeen increasedby B's actin. Therefore, A mast increase his consumption of the tocial good to U in order to reach an equilibrium consistent with B'spurchase of q2 quan- tity of the social good. This action, however, alters the satisfaction oh. tained by B. B must, therefore, make another adjustment. The result of the adjustment protest is the establishment of an equsi- librium aEiforA and offor B.The leveo atisfaction for Bis i wnhich it the satisfaction from Qf and q consiteont with B't original income consumption curve. The otarting income Irveltoss he changed and the protein repeated. 21  Figure 7for individual Aindicates points Hand G which are equilib- rium coRmbiRatioRs starting woith a lowcer and a higher iRcome thoE I. Thmse equilibrium positiosr are carrded over So Figure 8 schere a "Net Income CoRnsumption" curve Hs indicated. The oet curere~flects a chaoge io She indifference soap retsulting from she recognaitioR of joinS satisfaction oR she post of individual A. Bored oR she Eet iocoome con- sumoptioR curve, 0 demoaod wchedule cOO be estoblirhed schioh ofro takes ino consideration She joint satisfaction derived from She sociol good. Agains assuming I ovel of income for A, the price of she sociol good canbe varied (Pa, P, andP2).The qaniiesrQh.,Q,and Q are determioed. There price assd quantity relationships ore a parS of A's Ret demand schedole (DNA ); o is an eqoilibriom comabination foe indi- vidual B. The balace ofB's edeand Force (DNa ) canobe desived io She same msaoner as A's. The two carver coo shen he horizontally sommrd So determioe She "Ner Collective Demossd" (CDN). Amoumiog a conrtant cost social good, wtih AC and MC equal to P1, tar total outlput would be Q assd bosh A and B wcould pay P.. A would take Qf ansdBsrwouldtakesqf. Kafoglis' formulatioo ir of particuar importasce hecaus it poinos outrthe distincio and importance ofthestwootypmsof eoternalecoo- omiesof consumptio; joinsaisfacionand joint cosumpion(joit sopply). The Liodahi assd Boweo models involve goods which have She characterirstic of joiot conrumptions (joit supply). The Kafoglir model isnvolvs a good which has She charocteristic of joint satsfsctions. The methodology osed in aoolysis mast be coosistent woith she poetic- ular chrcterisic of She poblic good which gicms rise to She sitoation where external ecosnomims of coosomptios do exist. This aimo implies shag whmn a particolar meshodology is osed, she good ia the anolysis could be discusmed in terms of She characteristic wish which She mesh- odology is consisteot. Figore 7 for irdividoal A indicates points Hoond GCwhioh are eqoilib- riam combinations starting wish a lower and o higher income than I. Thinse eqoilibriom positions ore carriled over So Figure 8 where a "Net Inooms Consomptioo' rurve is iodicated. The net curve reflects a chaoge ia the iodiffereoce mop resultiog from the recogsnitioo of joisst satsfaction oo she past of iodividual A. Bared oR the oet income coo- sumption carve, a deomasd wchedule FOR be established which also takes into consideration she joint satisfaction derived from the social good. Again Oaming I level of inomoe for A, she price of she scial good can bevaried (Pa,P1, and P2). The quantities Qh, Qf, and Qf are determioed. These price and quantity relationships ore a part of A's net demaod schedule (DNA ); ef is an equilibrium combination foe indi- vidual B. The balance ofB's et demand rurve (DNa ) cansbe derived io the same manner as A's. The two carves FOR thrn he horizootally sammed So deserminse the 'Nes Collective Demood" (CDN). Assamiog a conrtaot cost social good, wish AC aod MC equal So P1, thse total outsputwould be Q and both A and B wcould pay P.. A would take Qf and B wossld sake qf. Kaofoglis' formuation is of particuar importooce becase it poinos ot the distinctions aod importance of she two types of externaon- omimsofrosumpion; jointssaisfacionoood jincosumwpion (joist sapply). The Liodahl and Bowen models involve goods which have she characteristic of joint consumption (joint sapply). The Kafoglis model involves a good which has she characteristic of joint satisfaction. The methodology used io aoalysis mart be coosistent wish the poetic- ular chracterisio of she public good which gives rise So she situation where external ecooomims of coosuospticon do exist. This also implies that when a paeticular methodology is ooed, she good in the ansalysis could be discussed in terms af she characteristic wish which she metho- odology is consistent. Figure 78cor individual A indicates points Hoond Grwbich are equilib- rium combioations starting wish a lower sod a higher isscome shan I. These eqailibrium positions ore carried aver to Figure B where a "Net Income Consumptioo" carve is indicated. The oet carve reflects a change in she indifference map resulting from she reognition of joint satisfaction on she past of individual A. Bared on she net income coo- sumption carve, a desand wchedule coo be established which also saber into consideration the jointsartisfaction derived froma she sciol good. Again asuming I level of income for A, she price of the social good canobe varied (P, P3,oand Pa). The qusantities Qh, Qf, and Qt are determined. There price sod quantity rolationships are a part of A's oet demaod srhedule (DNA ); rf is an equilibrium combination for indi- viduaolB.The balance ofB'soet demand crve (DNa ) canobedeived io she same manner as A's. The two carves coo then be horizaontally rammed to determine the "Net Collective Demaod" (CDN). Assaming a constant cast racial good, wish AC and MC equal to P1, tho total output would be Q and both A and B would pay P.. A wouldstake Qf ood B wossld take qf. Kafsglis' formualtion is of particalar importaoce becoore is poiots oust the distinctsion aod importance of the two types of external econ- omimsof consumption; jointsatisfactionand joit cosumptiono(joint supply). The Lindahl and Boweo models involve goods which have the characteristic of joint consumption (joint supply). The Kafoglis model involves o good which has she charactrristic of joint satisfactison. The methodology used io analyis mart be coosistent with she partic- uaor characteristic of the pubtic good which gives rise so the situation where external ecoomims of coosumpticon do exist. This also implies shot wheo a particalar methodology is osrd, the good io she analysis could be discussed in terms of She characteristic wish which she meth- odology is consistent. 22222 22 22  3.REVEALED PREFERENCES T here are two basic criticisms of the voluntary exchange theory of public finance involving revealed preferences. The first states that the individual will not reveal his true preferences for public goods. The second is that even if the individual did reveal his true preferences for a public good, there is no single solution to the problem of allocating resources analogous to that found in the allocation of resources to pri- vate goods. Both criticisms have been raised by Richard A. Musgrave and have apparently been accepted by many economists. In fact, al- though Musgrave was one of the first to bring the voluntary exchange or price theory of public finance to the attention of American econo- mists, he was also one of its strongest critics and has led the way to the rejection of the theory.' The first criticism was raised by Musgrave in relation to Lindahl's model. As it relates specifically to the Lindahl model, the criticism was treated in Chapter 2. However, it may be taken as a more general crit- icism about the applicability of the price theory of public finance to the problem of allocating resources to any good which has the character- istic of joint consumption. Therefore, the first section of this chapter analyzes the criticism as it applies to the allocation of resources, with- out reference to any particular formulation of the price theory of pub- lic finance. The second criticism is raised by Musgrave in relation to the appli- cability of the theory in a general equilibrium framework. Therefore, the general equilibrium model which was adopted by Musgrave to state the criticism is presented in the second section. The model is also applied to two private goods in order to determine whether it is the allocation of resources to a public good with joint consumption which is not analogous to the allocation of resources to private goods, or whether it is the model used in the Musgrave analysis which is not analogous to the theory of the allocation of resources to private goods. CRITIQUE OF THE FIRsT CRITICISM The question of whether or not preferences will be revealed by indi. viduals for a public good through the political process is both a practi- cal and a theoretical consideration. The theoretical issue is whether or 1. See Theory of Public Finance; and "Voluntary Exchange Theory." 23 3.REVEALED PREFERENCES T here are two basic criticisms of the voluntary exchange theory of public finance involving revealed preferences. The first states that the individual will not reveal his true preferences for public goods. The second is that even if the individual did reveal his true preferences for a public good, there is no single solution to the problem of allocating resources analogous to that found in the allocation of resources to pri- vate goods. Both criticisms have been raised by Richard A. Musgrave and have apparently been accepted by many economists. In fact, al- though Musgrave was one of the first to bring the voluntary exchange or price theory of public finance to the attention of American econo- mists, he was also one of its strongest critics and has led the way to the rejection of the theory.t The first criticism was raised by Musgrave in relation to Lindahl's model. As it relates specifically to the Lindahl model, the criticism was treated in Chapter 2. However, it may be taken as a more general crit- icism about the applicability of the price theory of public finance to the problem of allocating resources to any good which has the character- istic of joint consumption. Therefore, the first section of this chapter analyzes the criticism as it applies to the allocation of resources, with- out reference to any particular formulation of the price theory of pub- lic finance. The second criticism is raised by Musgrave in relation to the appli- cability of the theory in a general equilibrium framework. Therefore, the general equilibrium model which was adopted by Musgrave to state the criticism is presented in the second section. The model is also applied to two private goods in order to determine whether it is the allocation of resources to a public good with joint consumption which is not analogous to the allocation of resources to private goods, or whether it is the model used in the Musgrave analysis which is not analogous to the theory of the allocation of resources to private goods. CRITIQUE OF THE FIRsT CRITICISM The question of whether or not preferences will be revealed by indi- viduals for a public good through the political process is both a practi- cal and a theoretical consideration. The theoretical issue is whether or . See Theory of Public Finance; and "Voluntary Exchange Theory." 23 3.REVEALED PREFERENCES T here are two basic criticisms of the voluntary exchange theory of public finance involving revealed preferences. The first states that the individual will not reveal his true preferences for public goods. The second is that even if the individual did reveal his true preferences for a public good, there is no single solution to the problem of allocating resources analogous to that found in the allocation of resources to pri- vate goods. Both criticisms have been raised by Richard A. Musgrave and have apparently been accepted by many economists. In fact, al- though Musgrave was one of the first to bring the voluntary exchange or price theory of public finance to the attention of American econo- mists, he was also one of its strongest critics and has led the way to the rejection of the theory.t The first criticism was raised by Musgrave in relation to Lindahl's model. As it relates specifically to the Lindahl model, the criticism was treated in Chapter 2. However, it may be taken as a more general crit- icism about the applicability of the price theory of public finance to the problem of allocating resources to any good which has the character- istic of joint consumption. Therefore, the first section of this chapter analyzes the criticism as it applies to the allocation of resources, with- out reference to any particular formulation of the price theory of pub- lic finance. The second criticism is raised by Musgrave in relation to the appli- cability of the theory in a general equilibrium framework. Therefore, the general equilibrium model which was adopted by Musgrave to state the criticism is presented in the second section. The model is also applied to two private goods in order to determine whether it is the allocation of resources to a public good with joint consumption which is not analogous to the allocation of resources to private goods, or whether it is the model used in the Musgrave analysis which is not analogous to the theory of the allocation of resources to private goods. CRITIQUE OF THE FIRsT CRITICISM The question of whether or not preferences will be revealed by indi- viduals for a public good through the political process is both a practi- cal and a theoretical consideration. The theoretical issue is whether or 1. See Theory of Public Finance; and "Voluntary Exchange Theory." 23  THE PRICE THEORY OFEVALUE IN PUBLIC FINANCE not there is som~ething inherent iR the Ratue Ef public goods Er ins thr supply of and demoand for public goods which makes it ntees- sary or likely that the individual acting rationally wcould not re- seal his preferenes for the public goods. One situation that moighst lead to such a conclusions is oe in sohich arr individual Ear derive sat- isfactions from tbr supply of a pablic good scithout having 10 rxpress a Price, Cost D P MC b iI I I I D 0 qI q q2 Public Good,X Figure 9. desire for the good and without having to pay far the good according to his aotual individaal satisfaotion. Musgrave's attempt so illastrate such asituatio isbased ontwo proposiios:(1) aneqalquatity of pablio goads anad services is consumed by all taxpayer-buyers; (2) anindividual taxpayer's demand exoerts nso irnfauenoe oer she qanstity of publio goods supplied.1 The fles proposiion invooles a problem of defissing a public good ins teems of its characteristics. The public goad is said to be a goad schick bus the characteristic that each inrdividual receives benefits from she enrtire supply as if he were the only individual consumisng is (i.e., joins consumptionr). The equal-consumption definitiosn of a public good 2. Theory of Public Finance. 24 THE PRICE TsHcORY OF VALUE IN PUBLIC FINANE Rot thre is somethisng ioherent ist the Rature of public goods or i the supply of and demand for public goodo swhich makes sit neces- tory or likely that the individual acting ratiosrally would Rot re- seal his preferences foe she public goods. One situaions that might lead to such a conclusion is one in schich on inadividual cast derive sat- isfactiona from the supply of a public good without havinsg to expess a Price, Cost D P MC I I I I D I I o q, q q0 Public Goosd,X Fistare 9. desire foe Ike good antd without baving so puy foe the good according to his actual insdisidual satisfactiost. Musgrase's attempt to illustrate such asituatiois based on two proposins(1)n qul quanity of public goods and sercices is conumed by all tacpayer-buyers; (2) aindividual taxpayer's demand eerts no influence ocer the quantity of public goods supplied.a The first propositiast involves a problem of defistiog a public good ist terms of its characteristics. The public good is said to be a good which has the characteristic that each individual receives beuefits from the entire supply as if he were the only inadividual costsuming it (i.e., joit consumptiost). The equal-contsumptiont defistition of a public good 2. Theory of Pubic Fimonce. 24 THE PRI CE THEOstY OF VALUE IN PUBOLIC FINANCE st there in something inherent in the nature of public goods or i the supply of and demastd foe public goodo which mak es it stees- tory or likely thus the individual actistg ratiostally would stot e- veal his pefecences foe the poblic goods. One situatiost that might lead to such a costclusion is one in which ast individual cat derive sat- isfactiot from the supply of a public good without having to expesm a Price, Cost D P aC I o q, q 1q2 Public Good, X Figuare 9. desire for the good antd without baving to pay foe the good according to bin actual individual satisfaction. Musgrave's attempt to illustrate such asituation ishbased onttwo proposios:s(1)nqulquatity of public goods and wervices is consumed by all taxpayer-buyers; (2) an intdividual taxpayr's demand eerts no influence over the quantity of public goods supplieda The first proposition inveolves a problem of defining a public good in termo of ito characteristics. The public good it said to be a good which has the characteristic that each individual receives benefits fom the estie supply as if he were the only individual consuming it (i.e., joint consumption). The equal-consumption definition of a public good 2. Theory of Paublic Finasce. 24  issacerpted as apolar case wrhich ispossible evenif it mynotexist forsmansy goods.' The isstue here issohether or not a good wshich does fit this definitioR is likely to ho the cautse of individuals sot revealing their preferenres for the good. Figure 9 pretests use possible formusasltion of the process through wohich prefrences soight be rreeald even swhes the equal-cosumsption defhsition is ooosptsd und wtheR eaoh isndividuul pays acording to his revealed prefereneet. There are tso tustpayers A asd B. If taxpayers Aasnd Beeal thr tueprfrencs,saverticlssummationsof their individual drsmusds (as and hh) sould he desigsated hy DD. The optimtum smut s of puhlic good X, theR, is Oq, usd the optismum distrihution of the costs of producisg good X is OP.- Oq foe tuxpayer A and OPb- Oq foe taxpayer B. Assume that taspayer A reveals his true preferences and that taxpayer B does not reveal his preferensces. The collective demanud ionly A's demansd(as)ad oly Oqof god X still he mude availahle for equal consumsption. Taxpayer A is ins equilihriunm hut tuxpayer B is sot. If B's tas share is zero, as it swosld he if B duet sot rereul asypreferesce for X, B reully desires Oqa of X at the existing zero price istead of the quantity Oqs sohioh wtill he made available. Therefore, taxpayer B may have us inclisation to re- veul at least some of Ihis preferences. If B reveals part of his prefer. esceshis taxshare of the Oqt of Xriseshove zeroand A's taxshare declies. Athe lowerprice to A(OP -B's price), Ademands a greater quantity of X. The process, followed to its logiral conrlusioss, results is a situatius swhere hoth A asd B do reseal their true prtsferesres. Musgrase's serond peoposition involves the question of the effect that having a large numher of isdividuuls participate iR the determisa- tion of what quantity should he produred mill bave upon a single is- dividual's reveulisg his preferencoes. Is Chapter 2, Musgrave's analysis was rejected. The rejection of the duopoly type of asalysis was not based us the use of small numbhers is the asalysis, hut us the assump- tics thut thr isdividual hurgaised with other isdividuals us if he were a produrer attempting to maximize his profits. The individual who bus prefereesces for goods is auconsumer, sot a producer. Therefore, the 3. A reat deal of discussin was creasted, as to swhether or nct the equal. consumption defisition hsd any application is the real scortd, altec Sauelsomn used it in his model as s polar case ("Diagrammatic Exposition"). 4. Sharpanud Escaerraz, "econsideation of the Price or Exchange Theory of Public Finance." 25 isuacrepteduasuapolar case mhich ispossible evesifit maynt eist for many goods.' The issue here is whether or Rot a good which does fit this defisitios is likely to be the cause of isdividuals sot revealisg their prrferesces for the good. Figure 9 pretests one possible formulation ci the process throsgh mhich pelerences might be revealed ecen whes the equal-consumptios definition is accepted and when each isdividual pays according to his rerraled preferrscs.t Thereuare two taxpayers A andB.If tapyers A asd B reveal their true prefereces, a vertical summatios of their indicidual deetans (as asd bb) msuld be desigsated by DD. The optimum amount of public good X, then, is Oq, asd the optimum distribution of the costs of producisg good X is OP.5' Oq for taxpayer A and OPb Oq for taxepayer B. Assume thut taxpayr A reveals his true preferences and thattapayer Bdoes nt rvelhispreferece. The collective demndis only A's demand(as) and only Oqceofgood X will be made available for equal cossumptios. Taxpayer A is is equilibrium but taxpayer B is sot. If B's tax share is zero, as it swould be iffi dentreeal aypreferee for X,B eally desires Oq2 of X at the existisg aero price instrad of the quantity Oq, which will be made available. Therefore, taxpayr B may have us inclisatios to re- veal at least somr of Isis preferesces. TIB reveals part oi his prefer. rsces, histaxnshare ofithe Oqsof X rissubovrezeroand A's taxshare declies. At the lower price to A(OP -B's price),A demands a grester quastity of X. The process, followed to its logical conclusions, results is a situation where both A and B do reveal their true preferesces. Macgrave's second proposition isvolces the question of the effect that having a large somber of indiciduals participate is the determina- tionsofmwhatquantity should beproducedmwillbhave upos a single in- dividual's revealing his preferences. Is Chapter 2, Mssgrave's asalysis was rejectrd. The rejection of the duopoly type of asalysis was not basedon the useof smallsnumbers in the anlysis, butcsnthe assump- tics that the isdividual bargaised with other isdividualsas if he were aproducer attempting to maximize his profits. The isdividnual whoc bus preferesces ior goods isa cnsumer,snotaprodcer.Threfore, th 3. A great deal of discussion wuas creatrd, s to whrther orsot thereul- cnsumption definitioc had any applicaion is the seal wortd, alter NSaulson need is is his mcdel Es a pclar ease ("iagsammaic Exposition"). 4. Sharp and Escarras, "tReconsideration of the Prier ccExchange Theory of Public Finance.' 25 is arcepted us a polar ruse which is possible even if it may nnt exist fonemany goods.'The issue here is whethcer or not a good which does fit this defirition is likely to be the cause of individuls net rrvealisg their preferences for the good. Figure 9 presrnts one possible formulation ci the process throngh which pefrrences ssight be revealed ecen when the equal-consumptios drfinition is arcepted and when each individal pays according to his revealed preferesces.u Thre are two taxpayers A and B. If taxpayers Auand B revral their true preferences, a vertical summation of their indicidual demasds (as and bb) would be designated by DO. The optimum amount of public good X, then, is Oq, and the optimum distribution of the costs of produeing good X in OP.' Oq fcr taxpayer A and OPb- Oq for taxpayer B. Assume that taxpayer A reveals his true prefereces and that taxpayer Bdoesnt revealbhis prefereces. The collectiverdemand is only A's demand (as) and only Oqc of good X will be made available for equal consumptios. Taspayer A is in equilibrium hot taxpayer B is not. If B's tax shsare is zero, us it would be if Bdoesotreval any preference for X, Brelly desires Oq2 f X at the existing zero price instead of the quantity Oqt which will be made available. Therefore, taxpayer B may hove us isclination to re- veal at least some of his peferencre. lIB reveals part of his prefer- rnces,bhis taxshare ofithe OqscofX rises above zero andA'stax shre declins. Atthe lowrprice tA (OP -B'sprice), Ademands a greater quantity ci X. The procrss, followed tc its logical conclusions, results in a sitation where both A and B do reveal their true prefresces. Macgrave's seccnd proposition involves the question ci the effect that having a large number cf individuals participate in the determnuia. tion of whatquastity should beproducrdwillbaveupn aniinglein- dividual's revealing bin preferences. In Chapter 2, Musgrave's analysis woo rrjected. The rejection of the duopcly type of analysic was not bused on the use of small numbers in the analysis, hut on the assump- tion that the individual bargained with other individuals as if he mere a producer attempting to maximize his profits. The individual who has preferrnces ins gcods is acosumer, not a producer. Therefore, the 3. A great deat of discuasicn was reed, as so whether orscottherqal. consumption definitioc hsd any ayplicaticn in the seal world, aftr Samuelson used it in his model as a polar cuss ("Diagrammatic Exposition"). 4. Share and Eacarra, "Reccnsideraticn of she Price or Exchangr Theory of Public Finane."  analysis muost be based uot the isdividoaal's attempting to stasxitize his satsfaction. Thoat, it is necessary to assome that the iodisvidaal does have prefereaces ia regard to puhlic goods, oe that he doet receive satisfactios feosm pahlic gaada is relatiaE to tloe qantitieo he cn sasmes. The latter will he assasoed is the analysis which follows, so that simople smathesmatical expression of the assumoption of msaximiza- tion of oatiofactioo io teesms of moargioal utilities way he used., If the isndividual derives satisfacticon from each puhlic good ao he does from each priv-ate good, the maximoizationo of satisfaction woald he eopressed eatly the samefor both privateand pblkc goods (ssc%.M55c50 u >.mu0) The goodsereprestedha andhbcaohbe tabes as pahie goods, soch as national defesnse asnd edacatios, aod the goods representsed by y asndazcans be takeno as private goods, such as automoobies asd founstain penss. Givens this type of masisoization of satisfactions criterion, it wouald he impossihle for the isndividual to maximize his satisfactions if one of the goods has oqoal consumption asnd if at the same time everybody mast pay the same price. The tao-pokce asd the quasntity supplied coos- sot both he the same for all individuals unless it is asoumed that each iodividual has the same utility fuoctios for the good. Therefore, the isdividual aunder theme conditions woald have so reasos sore-eat his poeferensces foe the puhlic good. Homes-so, if the tax-poice is permitted to easy betweeo isndividuals asnd if it is deteomisned hy the tastes and preferences of the individual isei aecordaoco with the benefit theory of tasation), ho coo mass- mizs his satisfaction. The factothat ooe of the goods has equal consomp- ties dines sot isserfere with the iodividual's ability to maximizs his sat- isfactios. Is fact, the quastity of the pubhice good which is supplied doesssot haveotohbebasedpo thtasteadpeferecs of individuals jot so long as the individual's tao-pokce is determised by the individ- oat's preference for the gives quatityAs Threfore, the indieidual as- 5. The accepctance of indifference-coose analysis sod reltive dimisisbing mar- sisal utiity hbssoeen to goods istead of marginat-utitity analysis ssnd absolute diminishing marginal utilitc for all goods sloes ass allot she conctusiosa about receolod poeferesces ohich fotlos. 6. The fact that she qoantity at the poblic good is sot based upon sloe tastes and preerencos oftindividuas does affete llsoatos ofresources, butit des not affct she indioiduat's ability is maximise his satsatison or his motivatison toorevealhiaspeferncesMsoeisid aboutbhellfecto sbth -oisty ositaion o the sitocation of remources is Chapter 5. asalysis most be based upos the isdisvidual's attemptisg to maximize his satisfaction. Thus, it is necessary to assume that the isdividaal does have preferesces is regard to public goods, or that ho does receive satisfactios from public goods is relation to the qoastities he coos- sumes. The latter will he assamed is the analysis mhkch follows, so that simple mathematical expressios of the assumption of maximiza- tion of satisfaction is terms of margisal utilities may be ased., If the isdividual derives satisfactios loom each pablic good as he does from each private good, the maximizatios of satisfactios woald be epressed exactly the same for both priv-ate asd puhlic goods (u. Mub M-= )- Thergoods represntedba and bcansbe takes as public goods, such as natiosal defesse and educatios, and the goods represented by y andazcan be taken as poivate goods, such as automohilesand foutain pess. Gives this type of maximioatios of satiofaction criterios, it mould be impossible for the inodividual to smaximize his satisfaction if one of the goods has equal cosumptios anod if at ohs same time everybody most pay the same price. The tao-pokce asd the quastity supplied csa- sot both be the same for all individuals unless it is assumed that each isndividal has the same otility fusctios for the good. Therefore, the isdividal asder these condisions woald have so seas to reveal his profereoces foo the public good. Howeveo, if the tao-price is permitted to vary between indlividuals sod if it is determised bythe tastsadprefoerenes of the inodividual (ihe., is accordance with the boeeft thoroy of taxation), ho ean masi- mize his satisfaction. The factothat oe of the goods has equal cosump- tion does sot isterfere with the individual's ability to masximize his sat- isfaction. Is fact, the quassity of the public good which is supplied doesnotbhaveobe basedaupsonhe tassand prferencesof individaals just so long as the inodividual's tao-pokce is determined by the inodivid- al's preferesce foe the gives qatity5 Therefore, the iodividual as- 5. The sceptcase of indillferencces anatesis sod relcie dimiishing nm gisat utilty hetseen to goods istatd of marginal-utiity analysis sod obsolute diminishing omarginal otility for all gocds doses sot affeot tbe oonclusions about roeeaed profeomnces ohicolloiw. 6.The fact thot he qosntity oftheopulicogood isct bsedsupondte tses and preferences oflindioidualsdoessaffectthe allocationsofresoorces,hbutitdes sot allfeca tbe indioidal's abiitys somasisize his satisactoion or his motivstioc toreveal his preferencesMore issaid aoutheetofo hisypecof situstion son ohs slloeation of resmurces is Chapter 5. 26 analysis most be based upon the individal's attempting to maximize his satisfaction. That, it is necessary to assume that the isodividual dos have preferences is regard to poblic goods, or that be does receive satisfaetion from public goods is relation to the quantities ho coo- tames. The lattr will be assumed is the analysis mbich follows, so thatoimple mathematical expressiooofthe assumptionofmaimia- tion of oasisfaction is looms of marginal utilitios may bo asod.5 If the isodividual derives satisfaction from each pablic good as he does from each private good, the maximization of satisfaction woald beoexpremsedeacly the same for both pivate anod public goods Mu=-Mub MurMu= The goods represented by a and b can be taboo as public goods, each as national defense sod education, asod the goods represented by y anodozcan be taboo as privateogoods, such as automobilesand fotainopes. Gives this type of maximization of satisfacticon criterion, it woold be impossible for the inodividual to maximize his satisfaction if one of the goods has equal cosumption asod if as the same time everybody mast pay the same price. The tao-poise asod the quantity supplied csa- not both be the same for all individals unless it is assamed that each indiv-idaal has the same utility function for the goad. Therefoo, the isodividual under theme conditions wcald have so reason to reveal his prefeoences for she public good. Howeveo, if the tao-price is permitted to vary betmees isodividas and if itisdetrmied bythtatsadprefeeces of the inodividual (i.e. is accodace with she benefit theory of taxatiso), ho can maxi- miss his satisfaction. The fact that ass of the goods has equal cosump- tics does sot inseefere with she inodividual's ability to maximize his sat- isfaction. Is fact, the quantity of she pablic good which is s-applied doesmosthavesto bebasedaponhe tastesad pefereces of individais jast so long as the individual's tao-pokce is determined by theindiid- soal's prference for the gives qatity0 Thorefoo, the isodividual as- 5. The aceptanse sf indifference-cuooe asaysis sod relative dimiising mr sisal utsity betwees to goods istead of sarginl-ustilty- sostysis sod absolte diminishing maroinal toiity fsr sOl goods does cot sffect she coctusisss shoot roeeted poeferenoes whiobfsllsow. 6. Thefscttha he quastity ofthepublicgood issctbsdcupotetases andprereesof cindividualsadces affooetteallocatioofreasources,hbutitdes sot allec to he indivsiduat's ability to moaxisize his satisaction sor his otivstion torvel hisoreeenes.Msoeis sidahaotteeffct of thistyo fsitations son she allocation of resources is Chaptee 5. 26  der these conditions would hue a ottiton to reveul his peferenees foe the public good. The loot shut a large ntumeber of individuals muight he inveolved is sig- ntificant undehe foregoingoanalysis onlyoosoapraticlosideraio. The insdividuol maxuiumiziog his sotisfuction is ot offected by the nsumbter of other intdividuals ottemsptintg to maxoimsioe iheies escept us the Rut- hoer of individuals offets she foerenet's obility to hase the tax- price o the indieidual's tosses ond peefeesses.t Ansother practical conssideration, howoever, should he mode ut this poist. The asolysis ossuued shot the indieiduol hoows his tos-peice will he hosed uou hio tostes cod pefeees~ foe each public good. If it is ossumed shot the intdividuul occepts the totol of goversmest octiv- ity as one public good, it would sot he necessary to assume thus the tos-piesishoasedsuponosheidiidulsoasesoadpefeenees forseuch good supplied by the gocosnment.' The musimioatioc of satisfoctios criterionhbecomes s=~ . 55=0s e Inuthiscasegrpesens oil goverenmest acetivity and T repeets she individual's aerage tax billfper itofgoerenstgoodsandseries. Theollocatison soe- soueces to posticulae public goods, such as notiooal defese, highwaoys, education, etc., would hose to be based spun the least-cost combinotion oflthese goods inprovidingevarious quntities othsgod -ttl govesrmentactivity. Gient this type of umoximizatiou ceitesion, it would he possible foe the isdividuol so msosimize his satisfuctios. This follows ees sif the good, total governesnet ctivity, is oassumed to hose she characesitic of equal consumptios and if the tax-price is sot hosed upon she intdi- eidual's tastssaod pefereces. Inthiscse,she idiidul's pg i detemised independent of his tosses uud pefeseuces. The intdividual maoxicmizes his sasisfoctios by odjustiog his peivots contsumptios.' Pel- 7. Theseffectsof various types oflorgaizicosppon the Epplicabiity of she voluntary exchangepo rc e theory of public fleece is treated is Chapser 4. 0. De~iti DeMarco sates a belief shot us she psoctice of speciat assssmenot decreases, sthe taxpaer, is maoking op his oon hudget so tosses ompares every spcial assesoset sobh the coosumption of the crresponding certice hot cow- poses the wocle of his taxes with she ohote of the services hecosmes" (Fiest Peisciples cfl Pubic Finace, p. t10). 9tc Incceptedprcestheorycofpivate goodsthceadjutment tahes pacesoly asc asesult of she deceased incomue available fee privote cosuption. Iu tics chose formultsion ti the prie thesery of peblic goods, iscomte ovoilable for psi. cots cosuwptios is reduced hy the sasme prcess, bet she individuot's private cosumsption is restricted still fuesher by she necessity of wchisg his muargisal 27 der these conditions would hue o motieation to seeaol his pefierences foe the public good. The loss shot a lare oumber of individouls might he inolved is sig- niiicant understhefoegoingoanalysis olyospratical osidertio. The fndisiduol moximiziog his sosisfocsion is not offeted by the cumbee of other individuals attempting so moximioe theirs except us ohs Rum- bee ofinfdividuols offets she goernmment's obility to boss the tax- pri0e os the individual's tostes and prefsernces' Ansother proctical cnsideation, howeer, should he mode ut this point. The onolysis ossumed thot she intdieiduol bnows his tas-psice will he hosed spec his tosses osd pefeenes foreach public good. If it is ossumed shot the individuol oceepts she totol of foerement octiv- itsp ones public good, it would ot he onecessary to ossume thot the tox-pricsishbasedouponthesidiidual'ststsocd prefeuenes forseoch good supplied by she gosesnment' The moximiuotios of sotisfoetions criteriobcme55 5~s e, =p P Inthis csegepesents oil goerenmet octisity and T represents she individual's oaveoage too billfperusitof goe rmentgoodsoand series. Theollocotios elsre- soueces to posticufor public goods, such os national defes, highways, educotion, etc., would hose to be hosed upont the least-cost combinationt oflthese goods in providingcariousquontiie ftlhgood -totl goernmeotoactieity. Gles this type of maximizotions ceiteriont, it would he possible foe she individuol so macximize his cotisioctions. This follows cees if she good, tuol goerenteet activity, is ossued to hoe she chorocteristic of equal conssumption and if the tox-price is ot hosed upon she indi- eidoal's testes osd pefereces. In this coss, the individual's ! i detemined independent of his tastes cod pefessoces. The individuol maximizes his satisfoctions by odjusting his privots consumptions.' Pel- 7. The effectsofvaious types of organization uon the applicabity of she voluntory exchonge or price theory of public finosse is teated is Chapter 4. 0. DeViti DeMotes states a belief thus as the psactice of speciat assesswent decreoses, sthe taxpoyer, is uoking op his oon budget so tlongercompsres eey speciat uscecsment sigh the cosumpticon tithe corespoding sereice hot cuss. poses the shole of his taxes oith the wholeof cithe servicec he cosumets" (Fist Peiises oef Pubilic Finonce, p. t10). 9.Ic acceped picctherycofprivotesgoods theodestettaes paesolly us osresulhofshedecesed incomeoavailable forpivatecosumption.tsnthe obove formuolotion of she price theory of publfic poetic, sncoots ovoilahle Ice psi. cots consumption is redeced by she sowe precess, bet she individual's psisate consumton is restricted otill flesher by the nscessity of maohing his maorgfsol 27 der these conditions would hoe o motieotiou to eeal his pefeeces foe the public good. The lost shot a lare number of individuols might he involved is sig- niicantunderethefoegoingoanalysisonlyosaprcticlosidertio. The iodieidual moximsisiog his sosisfucsioc is cot offested by the uumhber of other indieiduals uttempting so maximioe sheirs except us ohs com- bos of indieiduols offects the foernent's ahility to hose she too- peice son she icdieiduol's tosses ood peefsoces.5 Another peoctical considerotion, howeer, should be mode ot this puint. The onolysis owsumed shot she iodieiduol boms his tox-psie willhbehoased uponhisotsesoodpefserecs foreach pulic good. If it is assumed shot the icdividual accepts she tol of goeromeot octie- fty os one public good, it weold cut be necessarp to ossume shot she tox-piesishbased uontheidiiduols tssood pefeeces foreaoch good supplied by the goernoment't The maoximizotion of stisfoction criterio becom os=~ " u --mu . In thisocasegepesets oll goernument activity and Tsrepeents she individual's aerage tox billpersunit ofgvernment goodsad sereies. Theollocotion else- soueces to posticulor public goods, soch cc national defes, highwaopo, educotion, etc., would hoe to be hosed upon she leascost combinaotion oflthese goodsincprovidingeoarioucquntites othsgod- ttl govesonmectactiity. Gicen this type of moximiootioc ceiterion, is would he possible foe the individuol to maxuimiue his cotisfoctio. This followstevenoif the good, totol government octivity, is assumed to hoe the choraoeristic of equal consumption and if the tax-peice is cut booed upoc the indi- eiduol's tstes ood pefeenes. Is this cuss, the indiciduol's ui, is determsined iodependent of his tosses ood pefeenes. The individual mosimioss his sosisfctsion by odjusting his private consumption.' Pef- 7. The sefcesct ousaious types of organizations upon the applicability of she vountary exchonge or price theory of poblic flosse is treated is Chopter 4. 0. De~iti DeMarco states a belief that us the pracsice of specialasesmn deceses, sthe tospaye, is maokfng op his oon budget us logecompases evesy special ssescmess with she consumption ti the corresponding seico hot coos poses she chule of his taxsc with she whole of ths sesvices ho poseses" (First Peiises of Pub lie Flosse, p. 110). 9.Ic accepted pricstheorsfpivatcegoods theodjestmsenttaes pleslely as osresuofshedcesed inomecavilable fo pivatecosomption. Inthe aove fosuolotion of the price theory of peblic coods, inecose ovailuhle ice psi- cute escosuptions redeced hy the cows process, bet she individuao's privote oumption is restricted still further by she necessity of makhing his marsginal  erences for pubhlic goods ore revealed hut she reealing perocess muost he doot through she odjostmsent of peivatercosumsptiono00 However, if the govermsent does attemopt to hase the too-prioe opon inodividuaf tatstes and preferences (the beoefit prisnoiple of taxations), the individual soll he ohle to osaxoiie hit satisfoctios by adjooting his too-pokce s or olteroative to odjuosting his privateososptions. Theeeforeethe individualtmay haveoaomotivation to reveolbhis peefeeooes for total goveeonmest activity through the political peocess. Its either oase, preferesces see revealed. Io She soneca000, the assomp- tionsaouossheontre of the political process mssoes itoecessory for the isndividuol to reveol his preferesces sheoogh his hehovior in the taroee proess. If the politicol process is copohle of hosing taxessupoo isdividsol tostes sod preferences, the individual hos a motivotison to reveol his preferetnres foe the puhlic good ints he political procews. CRITIQUE OF TOE SoCONs CRITICISM Assuming true prefereoces see reveoled, Moosgrave contnds shot there is still anoother flaw in the volootary exchange theory moodel. "Evens if off prefeenoces ore reveoled, shere iso single hests olution aoologoot so the Poreto optimusoo in the satisfoction of porefy private wanRts. IR- sead we ore confronted swith forge nooer 01 solotisoss, aof w5hich ore optiomol its the Pareto sense."" The eqoilibriumo omodef used hy Mosgrove to doer these conclusions is hosed opots a model developed hy SamuesoR."5 Figure 1Q isare prodoction of the Moosgrove version of this model. The hottom diagrams is the fomilior teoosformotioo coeve, ood she other tswo ore iodiffereoce mas pof individuals A and B. OC sod OD ore soid to reprresntshe distrihosion of inomehetweeo A asd B, sioce OC ood OD ore the quaootities of privote goods shey roofld hold if they held ofly privote goods woith their inomess. Individual A is arbitrarily msoved along hit iodifferencercurve it, which cootinss comohinatioo OC of peivate goods. Giveo the traosformation curve's prodoetion fitoits, this process limits individual B to asecific combination of sociaf sod private goods for stility pet dollar's weorth of spending for each private good equal so she orhi- trarify sdetermsined marginal utility rer dbollr's worth of sendino foe puhlic goods. 10. Tiebout prsens soill aother morsos of reoesting preferences thee he con. cludes tfsom his soofysis shot ereferences for losal government services se expressedl by indlividuols through their chsoice of suburbansocommuity aound the lag itis inour moeeo society ("Pore Theory of Locaf Expenditures"). h1. Theory of Poblic Finance, p. 84. 12. Ibid., p. 8ts- erensces foe pohlic goods ore reveasled hot tho revealiog process most be door throogh she adjoetmeot of prioate coosomptios.0 However, if she goverment does attemept to hose the too-price opon inodividoal tostes sod prefereoces (she heoefit priocipleoofsoaxstioo), the iodividoal will hr ahle to maximize hit satisfaction by adjustiog his too-price Os OR altecoatice to adjussiog his private cosomptioo. Thereforeethe individual may haveamoti-stiooso reveal his prefereoces for total goveroment activity throogh the politicol process. Is either case, preferences ore revealed. fo the one case, the ssomp- tioo shoot theonature of the political procesmakes it necessory for the iodividoal to reveal his preferences throogh his hehavior its the market proress. If she politico1 process is capahle of hosing taoxes upoo individoal tosses sod prefereoces, the iodividoal has a motivotion to reveal his prefereooes foe the poblic good ints he politico1 process. CRITIQUE 00 TOE SrCONDr CRTCSMo Assoming houe prefereores see reveasled, Moosgrove cootenssd shot there istetill anotherlaw io the volootory exchaoge theory model. "Even if oll prelerences see revealed, shere iso siogle bess solutiots aoalogos to the Paeto optimum ints he sstisfaction of portly private waots. Io- stead we ore confrooted with forge numbeer of solotioos, all of which see optimal ins the Pareto sense."15 The equilibrium model sed by Musgraoe to derive these conclusions is hosed spos a model developed by Samesslson?2 Figore 1Q isare productiott of the Musgrave version of this model. The bottom diagram is the familiar transformatios curve, sod she other Iwo see iodifferece mapsof individualseAand B.OCoand OD are saidto reprsetthe distributios of iocome between A sod B, since OC sod OD see the qutootities of pricate goods they could hold if they held only private goods with their income. Insdividual A it arbitrarily moved along his indifference curve it, which onotaios combination OC of private goods. Givets the transformatison curve's production limits, this process limite individual B to a specific combioation of soial sod private goods for utilisy per dollar's worth of spending foreach private ood equal so she arhi- trarily etermsised waogioal utility per dollsr's ortsh of sendino for puhlic goods. 10. Tiebsout prsenos sill aother omeans of evesliog poefeeces ohen hr coo- cludes fros, his aoalysis that proferences for looal governmwent services ore expesedf hy indlividuals throsgh ther choice of sobsrha ommunsitysaound she forge cities is ouremodywn society ("Pore Theory of Local Cxpenditsure". lb. Theory of Public Finance, p. 84. 12. lb id., p. Ofn 28 renees foe public goods ore revealed hot thc revealing process most hr door through she adjostwest of privatetcosusmptio."t However, if she govermeot does attempt to hose the tox-price spos iodividsol tstes sod peefereoces (the brothst priociple of saxatiots), the individual will hr ahle to maxoimize his satisfaction by adjustiog his too-price s or alteroatice to adjuoting his pcivatercosumptio. Therefore the individual may bore a motivations ts eveal his preferences for tots1 goveromeot activity through the political process. Its ether cost, prefereoces ore revealed. Io she otse cooe, she ssomp- tion abot theonatureof thepolitical process wokes itoecessary for the iodividual to eveal his preferesces shrough his hehavior ints he market procew. If she political process is capable of basiog taxes spos individual tosses sod prefeence, she iodividool boo o motivation to reveal his prefereoces for she public good ints he political process. CRITIQUE OF THE SECONDs CoRTeCSM Assming true preferences ore revealed, Moosgrove conteode that thereistilloanotherlaowinsthevolutrychage theory model. Evens if oll prefereoces see reveasled, thore is 00 single beet solutios aoalogoos to she Paeto optimom its the satisfaction of purely private wons. Io- stead we are cotsfrotedsith largesnomherrof solutions,all of which see optimal its the Ports senset.""5 The eqoilibiuom model sed by Musgrave to derive threse otclsoions is hosed spots a model developed hy Somseleoo.0t Figure 1g isare production of the Musgravvoversion of this model. The bottom diogram is the familiar traosformation curve, sod the other two ore iodiffeeoce maps of iodividuals A sod B. OC sod OD see said to represent the distribution of inometbtween A sod B, since OC sod OD see the quaotisies of prioate goods they could hold if they held onsly private goods wish their lnose. Individul A is arbisrarily moved aloog hit insdifferenscecurve it, which cootaios combiostios OC of private goods. Givet he traosformaions curve's production limits, this process limits individual Bto a specific combinations of social sod private goods foe utility pr dofllace woth of spending foreach prioate good equat to the arbi- tOarify ietermined warginal otility toes doflar's orth of seonding foe puhlic good. t0. Tiebout prsentss stiUl soother mers of evoalhng prferences ohen hr con- cludee less, his anofysis shot references for lootl tsoversorentservices se expessed by iodisiduals through their chokce of soburban communcity aounod she forge cities is our modewn society ("Pore Theory of Locaf Uxpenditures"). it. Theory of Public Finaoce, p. 84. it. Iid., to- Ot1o. 28  each point on individual A's indifference curve. Curve MD, therefore, represents the various comsbinations of puhic and private goods avail- able to individualiB as individual A in arbitrarily msoved along his in. difference curve is. Point W is the point of tangency swith the highest possible indifference curve aad detrmninrs the quantities OG of public each point on individual A's indifference carve. Curve MD, therefore, represents the various combinations of public ond private goads avail- able to individualiB as individual A is arbitrarily msoved along his in- difference curve it. Point W in the point of tangenvy woith thse highest possible indifference cutrve and detensinos the quantities OG of public Public Good I Individual A lodivial AInldioidual B Pubic Good Inldividul A Puhic Good Inldividal B each poist on individual A's indifference carve. Curve MD, therefore, represents the various ombinations of public and private goods avail- able to individual B as individaulA is arbitrarily msoved along his in- difference curve is. Point W in the point of tangency with the highest possible indifference curve and determiner the quantities OG of public Public Good Pubhic Good Indiidul A Individal B N Z M G6v-- -------G' a J1------------' -7T 0 S C 0 Private Good 0R D K Figure 10. goods and OK of private goods which individual B would desire with- oat individual A being worse off than if hr held all of his income as private goods. The tame process is then followed for individual A by moving individual B along his indifference carve it. Curve NC is then deceloped asd quantities OJ of public goods and OQ of private goods are found to he the combination individual A would desire without mak- 29 Figure it. goods and OK of private goods which individual B would desire with- Rut individual A being worse off than if he held all of his income as private goods. The same process it then followed for iodividual A by moving individual B along his insdiffereoce curve it. Carve NC is then developed sod quantities OJ of public goods aod OQ of private goods are found to hr the combination individual A would desire without mak- 29 Figaro 1. goods and OK of private goods which individual B would desire with- out individual A being worse off than if hr held all of his income as private goods. The same process is then followed for individual A by moving individual B along his indiffeence curve il. Corve NC is then developed and quansities OJ of public goods and OQ of private goods are found to hr the combination individual A would desire without mak-  ing iedividual B worse off than if he held ail his income in private goods.11 The optimat developed ie the foregoing aalysis are preaseted on a utility frontier (Figore 11). Point X represents the ordinal maue ment of satisfartion for individuals A anad B when individual A has the Ordinal Index of Welfare, A i 2P --- - -- 2i ZI I I ilT i2W Ordinal Index of Welfare,B Figare 11. 13. Muave aasues theat the distribution at iacome is given asd docs nat change hot this is incoataible with the methadology sed. It swe conasider ita general equilibrium view waith oaly two godsl tand twoa indivdual, the dis- tributittatfthephyialnietsepreents the inometdistribution. Figure B shoas that the tne soluttion resulted is individual A holding OQ afthlb privlate ood asd individuall B holding OR afthlb private good aod tbe ltwo holding 03 af the pubicood. The othersolutiongave individaltA,OSaofthe pivateood aad iadividual B, OK afthlb psivate gaod and bath individuls had 0G of the pablic ooad. It, thteeore, doea not apper to hr crrect to tay that the ditribo. tioo incoCe tremains OC/OE for individual A aad 0D/OE for individal B. 30 hag iedivdual B TorIe off thaR if he held all hit ierome ie private goods.tt The optima dereloped int the foregoing analysis are presented one utility frontier (Figure 11). Point X represents the ordinal maue ment of satisfaction for individuals A and B twhee individual A has the Ordinal Index of Welfare, A i 2P----- -- - 2i i1V - - - - - - ZI iT iW OilIdxoWeae, Fite11 13. Motoetac Hater, ahlt the d~~~~itihiaofaaeitaesasddett shIaV hat -- thie a soaiiswt h sa aaysedIfe aadti Oe~slasslihoamaisos ItaltaoododwidaistIbdt eboMsgav asue that th distibutiot eeofs itiicoe As bglive0 ad dobs oa toad aad intdiaidal B boldiag OR of the private gaad tand the two holdiag 03 afthlb public goaod. The athersoluioan gass itdiaidal A, 00 at the private gaod Rod individal H, OK aftho privatec gaod and bath itdiidals had 0G at tbe poblic goad. It, therefare, dart not apper to be coraact tosay that the dietaiba. to incomae remains OC/OE for inidal A tand OD/OE tar individual B. 30 ing individual B worse off thaR if he held all hit inome in private goods." The optima dereloped iR the foregfoing tanalysis are preaetted oe utility froetier (Figore 11). Poiet X represents ths ordieal meatuae- meet of stisfactioe for individuals A ted B wohen indiiduaalA has the Ordinal Index of Welfare, A i 2P---- -- -- 2i iV ----- iT iW OilIdxoWeaeB ige11 13. Moegetas allow ca abet abc d~~~ieibaa atisw it icolddett shaagc boa thie a iaaawpttibta w~~~~ith wrbdltosdIt e aada tI teteH - - - --hcit taco 0t-Iytoood s w aiaoflsd RibotiaR~ ~ ~ ataspyiI aacpssoto oosdesbos.Foc ebowe~~~ ~~ btthoaetoiorale is diiAbaigOQ taspisc 13sa atgv aswsmes that/O tat idisiion Af sadom 0isO tieard didoes no. 30nebtti sicmail ihte ehdlg sd fw osdri  REVEALED PREFERENCES combination P and individual B has the combination T of public and private goods. Point Y represents the ordinal measurement of satisfac- tion when individual A has the combination V and individual B has the combination W of public and private goods. The other points on the utility frontier could be developed by varying the original distribution of income so that either or both individuals are on a different indif- ference curve at the start of the analysis. The conclusion drawn from the analysis is that "the area ZYX [in Figure 11] shows the infinite number of possible solutions that leave A, B or both, better off than at Z, where no public services are supplied."" The above review of the methodology used by Musgrave raises the question of whether the arbitrary movement of one individual along an indifference curve, to determine what combination of goods a second individual would like to hold, is compatible with price theory analysis. The "Edgeworth box analysis" of exchange makes use of this method to establish a contract curve which contains an infinite number of op- tima. In other words, it establishes those changes in social variables which can take place through "trading."15 Trading, however, is not the object of the voluntary payments model. The voluntary exchange approach must be based upon a money econ- omy and not a barter economy. The Musgrave analysis tells us nothing more than what the "Edgeworth box analysis" tells. In other words, it is the barter nature of the analysis (i.e., the arbitrary holding of one individual on a given indifference curve while permitting the other to choose the combination of goods which maximizes his satisfaction) which causes the existence of an infinite number of Pareto optima points. Figure 12 presents the Musgrave analysis using the private good defi- nition for both goods. The change in definition does cause a basic change in the procedure. This change is that the placing of individual A at a point on his indifference curve leaves a line of attainable com- binations (based upon the price ratios set by the transformation curve) available to individual B instead of a specific combination of the two goods. Assuming the individuals maximize their satisfaction, we can still determine the one combination which individual B will hold when individual A is at each point on his given indifference curve. Therefore, we can still determine a curve MD, which is analogous to the MD 14. Musgrave, Theory of Public Finance, pp. 83-84. 15. Kenneth E. Boulding, "Welfare Economics," in American Economic Asso. ciation Committee, Survey of Contemporary Economics, pp. 18-19. 31 REVEALED PREFERENCES combination P and individual B has the combination T of public and private goods. Point Y represents the ordinal measurement of satisfac- tion when individual A has the combination V and individual B has the combination W of public and private goods. The other points on the utility frontier could be developed by varying the original distribution of income so that either or both individuals are on a different indif- ference curve at the start of the analysis. The conclusion drawn from the analysis is that "the area ZYX [in Figure 11] shows the infinite number of possible solutions that leave A, B or both, better off than at Z, where no public services are supplied."14 The above review of the methodology used by Musgrave raises the question of whether the arbitrary movement of one individual along an indifference curve, to determine what combination of goods a second individual would like to hold, is compatible with price theory analysis. The "Edgeworth box analysis" of exchange makes use of this method to establish a contract curve which contains an infinite number of op- tima. In other words, it establishes those changes in social variables which can take place through "trading."1t Trading, however, is not the object of the voluntary payments model. The voluntary exchange approach must be based upon a money econ- omy and not a barter economy. The Musgrave analysis tells us nothing more than what the "Edgeworth box analysis" tells. In other words, it is the barter nature of the analysis (i.e., the arbitrary holding of one individual on a given indifference curve while permitting the other to choose the combination of goods which maximizes his satisfaction) which causes the existence of an infinite number of Pareto optima points. Figure 12 presents the Musgrave analysis using the private good defi- nition for both goods. The change in definition does cause a basic change in the procedure. This change is that the placing of individual A at a point on his indifference curve leaves a line of attainable com- binations (based upon the price ratios set by the transformation curve) available to individual B instead of a specific combination of the two goods. Assuming the individuals maximize their satisfaction, we can still determine the one combination which individual B will hold when individual A is at each point on his given indifference curve. Therefore, we can still determine a curve MD1, which is analogous to the MD 14. Musgrave, Theory of Public Finance, pp. 83-84. 15. Kenneth E. Boulding, "Welfare Economics," in American Economic Asso- ciation Committee, Survey of Contemporary Economics, pp. 18-19. 31 REVEALED PREFERENCES combination P and individual B has the combination T of public and private goods. Point Y represents the ordinal measurement of satisfac- tion when individual A has the combination V and individual B has the combination W of public and private goods. The other points on the utility frontier could be developed by varying the original distribution of income so that either or both individuals are on a different indif- ference curve at the start of the analysis. The conclusion drawn from the analysis is that "the area ZYX [in Figure 11] shows the infinite number of possible solutions that leave A, B or both, better off than at Z, where no public services are supplied."" The above review of the methodology used by Musgrave raises the question of whether the arbitrary movement of one individual along an indifference curve, to determine what combination of goods a second individual would like to hold, is compatible with price theory analysis. The "Edgeworth box analysis" of exchange makes use of this method to establish a contract curve which contains an infinite number of op- tima. In other words, it establishes those changes in social variables which can take place through "trading."" Trading, however, is not the object of the voluntary payments model. The voluntary exchange approach must be based upon a money econ- omy and not a barter economy. The Musgrave analysis tells us nothing more than what the "Edgeworth box analysis" tells. In other words, it is the barter nature of the analysis (i.e., the arbitrary holding of one individual on a given indifference curve while permitting the other to choose the combination of goods which maximizes his satisfaction) which causes the existence of an infinite number of Pareto optima points. Figure 12 presents the Musgrave analysis using the private good defi- nition for both goods. The change in definition does cause a basic change in the procedure. This change is that the placing of individual A at a point on his indifference curve leaves a line of attainable com- binations (based upon the price ratios set by the transformation curve) available to individual B instead of a specific combination of the two goods. Assuming the individuals maximize their satisfaction, we can still determine the one combination which individual B will hold when individual A is at each point on his given indifference curve. Therefore, we can still determine a curve MD, which is analogous to the MD 14. Musgrave, Theory of Public Finance, pp. 83-84. 15. Kenneth E. Boulding, "Welfare Economics," in American Economic Asso- ciation Committee, Survey of Contemporary Economics, pp. 18-19.  cureond woith one good defined ast Opublic good. Using aritory movem~eRtR along individual B's indifference cureR, we0 can determoine individual A'R NCI cure which is analogous 10 the NC cure found with the poblic good definitioR. The com~binatioR of privtle goods 1 and 2 whioh individual A coold hold without maokitog individual B worte off Private Good 2 Prioate Good 2 Individual A Individual B IT- 0 C, S Q C 0 RD, K 13 1815 Private Good I Private Good 2 0 -' -------H- H, 0 D U LC E Private Good I Figure 12. isROQand OJ, espectively. Individol Bcould hold OGof pivate good 2 andOK of privtegood1wthout maig idiidul Aworeoff. The optimao deoeloped in the onalyois with Iwo private goodo coo he preseoted oR 0 otility frotier (Ftgore 13). Points X ood Y have the sam~e meaning 0s points X and Y to Figure 11, except thot wow we ore considering the quantity of Iwo privote goodo to he oupplied. The areo ZYX ohows the tofiotte oomheo of possiblo solotioos that looco A, B, o 32 cuv ound with one good defined osn opublic good. Using arhitrory movewents aong iodividuol B'o indiffereoce corve, we coo deteromioe individual A't NCI curve which is analogous to the NC cOre fouod with the pohlio good definition. The combhintiono of private goods 1lond 2 which individual A coold hold without mokiog individual B worte off PrivatefGood 2 Privat Good 2 Individul A Individual B T50 V M 0 C, S Q C 0 RD, KI13I181 Prioote Good Prioate Good a 20 A wa -Ig' ' 0 D U LC E Prvtoot Good I Figore 12. is OQand OJ, respectively. Individual Bcould hold OG ofprivte good 2 andOK of pivtegood1wthotmakig idiidul Awore off. The optitoa developed to the ooolyois with two private goods coo be presented 0on o tility feootieo (Ftgure 13). Poiots X ood Y hoce the some moeaning as poits X and Y io Figure 11, except that now we are coosideriog the quantity of two private goods to he supplied. The aoeo ZYX thowt the iofioite ooumhor of posstie tolutions that leave A, B, o 32 crefound with one good defined as opublic good. Usiog arbitrary moEveent along individual Gos indifference curve, we coo determioe individual A's NC0 corve which it anologoos to the NC cOre foood with the publicogood definition.The combhinationoof private goodslooad 2 whioh iodividoal A coold hold withoot maokiog individoal B wooto off Prioate Good 2 Prioate Good 2 Iedividol A Indioidal 0 3 *-:--- I 0 C,2 S Q 0 0 RD, KI13 GI1 Private Good I Private Good Z EPT EDJ ~ - -4- W 0 D U LC G Prioate Good I Figore 12. is OQoondOJepectively. Indicidual Bcould hold OGof pivte good 2 andOK of pivtegoodl1wthot maigidiidual Aworseoff. The optimao developed to the aooiyots wtth two private goodt coo he peented oo a utility frootteo (Figure 13). Pointt X ood Y hoco the 10am0 meaning as points X and Y to Figure 11, except that now 100 Oare coosideriog the quantity of two private goods to he tupplied. The ae ZYX thowo the infioite 00mer of posotie solotioos that leave A, B, o 32  both better off than atZ, wherenoquantity of private good 2wold be supplied. It bas been showns that lbs muodel sed by Musgrave results is an infinite number of optimoa when a public good and a private good are used or whben two private goods are used. Any conclusion derived fomu Ordinal Index of Welfare, A ip ____ -Y IT iW OdnlIndx o efr, Piue13 Musgea~~e's esodel is applicable IC le boyi essl ugaei O~~leect sobes be CCCCI~~~~~~~dS Iessbspbi gsd sdlIIC CSigl spislssssse - C-C-b-rabd oseeisC- CIIbllsabeseo sisieSpilus esalssisssI dseI b S~CSs ulCgs is lbs ss~del. Tbe seje~lisS Cf tbe C IesisbedslbfatSt sbeussesssd b M~geseI 1IV b ~iiyC b rlcsei C cssi~esssiblepieebeeyfpIs eCdI adbrf~eC sss e rpeced s yild sigieCplss~s sces ppled Ie plblc gsds i T i33 bothbbetteoff tbanat Z,ssbere noqatiyfpiae god 2wsld be sspplied. It bas besn sbhsss tbat lbs ssodel ssed by Musgre results is a ininite numsber Cf optimaC when a public good aud a private good ars used o entwso priae gods areessed.Any coclusionsdeied froml Ordinal Index of Welfare, A --Y--- - ZI iT 7 OdnlIndxo efr, Ise13 Museac's u~dl i apliebleIs eic Ibseyis eseal.Museac i eserect when bs S~~sshsdes fe~ul bis slcf~ssse blusu Cplisus sausi e eacbd. Hsoeeeis Cpe~s IsI te aseEe S C I - -- - Z - -ge- -Ysl sui~ ssIdP slsj~ls~ fC ulcg is Ibe ,sodel. Tbe Cejo~ti~ Cf lbs critiie sbsdC b atta lbsssoe sedby usga~eI pes b ~IdiyC b t~ssi C esusislesl~ ~ sct b rclee fpisaogos u lee~eC 551~~~ ~~ beepcI syedassi pilmsbsapidI ulcgos I3 both bette off thanat Z,swhee noquantityf piate good 2wuld be sspplied. Itbas beeshown tbat thse model used by Musgrave resslts in an infisite umuber ofl optima swbes C public good and a private good ae ued o entwso privae goods areeused. Anyonuclusionsdeived fom Ordinal Index of Welfare, A IMP -- - _ x IV--- IT iW OdnlIndxo efr, Ise13 Musgeace's ss~~del is applicable ICpiebeyiseealMseaos correolsobes be cC~~cl~des fess bis ulcgossoe blasu oplissu easol e rachd. Hsceeeil apeas Ial ls asese o a I - -- - Z s-ge-- -Ye uio sDlde clsiclso fC ulcpe is~~~~ ~~~ lsodlTbrjciooflsritIs sbsdu b ata lbsmcdl ued y MogeeI pec b oidyoflscicseisS Msgraes odellbs picbe tof prie oods ai gheefMugeisl De erpco Cyeda sigle optiumsl isnasno u t sheb apluied Is public gd. 33  Samuelson did oiginate 1th0 model anod did criticize the v'oluntary exohossge opprooth 10 pohio fissonce in she sa0m0 article."5 The criti- cisms,however,weeiR ters ofswheherornot peferecs woul~dbe roeeledRand the5model wso inRtersofasolutionto hepole. Al- though Musgrave asd Rther ec0ooists appeored so believe shos she cause of the0 large number of solutions io She moodel was She exstsence of apub~lic good woith thse chracteristicoHf joint onsumRption, SamuelI- son never maode0sRch astatement. In foes, Sasmsslsos so developing hsis m~odel referstolhis original orkhon an exchange modl inFoudation. In this original exchange msodel the goods are Rot ossumeod to have she characteristic of joint consumpton, ond yet his conclusion is Shot "Be- cause She oiginal specificatioR of She seonod man's ottily seas arbitrory, the final equilibiu saso arb10 oitrary and not oniqoo."151 Thestotemsent waos moade with respecol tohe "Edgeortooh boo osnlysis," host in fact the SamuelsoR model is noothing 01000 thano a presentatioR of Edgeoothian onolysis where she quontily of goods is nsot flood but1 is limised So she varioso qoaotities thot could he produced uodeo she oonditions of effi- ciency. The esistoee of she poblic good io she modol modifies She as- olysis hot doos sot offect she natooe of the oonclosioss. The orhitrory satement of she second moo's utility is the coose of she lorgeosumer of solutions in she model, and not she noture of she goods used is the model. Samoelsoss solved she peohlem of o loege numher of solotionshby usisg a swelfore fonctios for society. The trodisioool solution So os Edgeortooh- iaR ooolysis, however, is osoolly soated SR looms of she relotive horgoin- ing poswers of the individools isvolved is she exchange. Pokce theory follosws this soodisionol foome of referenseois thot iocome derioed foom she poodsctiv'ity of resoorcosoused io prodoction deteorsines she hoogoin- ing power of the individuaols isvolved in she exchooge. Is she next chopter on ottempt is mode so onvert the Musgrove-Somoelsos model fos o puoe eoohosge model whioh reqssires a swelfooe fonetion 00 an arbitraroy stotomens of hoogoining powerO of individools So o model wohioh rests oR she poinciples of poice thory. 16. "Foe Thoey of Puhlio Esxpsnditore." 17. Founsdosios of cosoesic Analysis, p. 238. Somuelson did originate she model and did criticize She voluntary exohonge appoach So pohic flsosce is the sa010 ooticle." The criti- cisms, hoswever,sweeinterms ofswhethero ot pefeenes woooldhbe revealedoandthe modelswaosinesofosolstionohpole. Al- though Musgrove ond other economists oppeoeed So helieve thot She cause of She large number of solotions is the model waos the existence of a public good woith theocharacteisic of joist consumption, Samuel- son 00000 modo suehoasosomost. Is foes, Somuelson is developing his model referssto his original work on an esehooge model in Foundations. Is this original exehonge model the goods 000 not ossomed to haveothe characteristicoRf joint cosumption, sod yes his onclusion is shot "Be- cause the original specification of she seond moo's otility waos arbitrary, the finalequilibrium isolsoarhitraryoandotuiqe."17The staement waos mode swith respect to she "tEdgeortsh box onolysis," hot is foot the Somuolson model is nothing 01000 than o preseototion of Edgesorothion onolysis sohee she qoontity 0f goods is not flood hos is limited to the variouss quant~ities thot could he produced under she conditios of effi- cienoy. The existence of she puhlio good is she model modifies she oR- olysis hos does sot offect the notore of the eonclussions. The orbitoory stotement of the seeond moo's otility is the couse of she lorgesnumber of solut~ions is she model, and not she nature of she goods osed is the model. Samoelson soloed she prohlem of o lorge nomheo of solotionssby osing o soelfore fonesion foo socety. The troditionol solotion So oR Edgeorth- ios onolysis, hosweser, is osuolly soated is looms of She relotive hoogoin- isg powters of the individools inolvod in she exchange. Pokce theory follosws this troditionol foome of oefeoeoceoin thot ioncome derived foom she peoducsivisy of resourcesoused is producsion deteomioms she horgain- ing powerc of she individuols involvod is she eschooge. Io she soot ehopter on ottempt is mode So onvert the Mosgrove-Somoelson model from o pure exchonge model mhioh requires a woelfore function 00 an arhitrory satement of hoogoining poswer of iodividools So o model wohieh rests on she poineiples of pokce theory. 16. "Puee Theory of Publie Espesditure." 17. Foosdaos of cosomico Analysis, p. 238. Samuselson did riginote She model and did critiiz She voluntory exohonge oppooch So pohlic finoote is the some ricle." The ceiti- cismss, hosoever, woere is teems of swhether oo not preferesoes woold ho reoeledoandthe modelswassinteossofoasolutiono the polem. Al- though Mosgrave ond other economists oppeored So helieve shos she caose of she lorge number of solotios is the model waos the exstence of o public good woith theochoooteristic of joist onsumption, Samoel- son never mode ssohoasosement. Is foot, Samoelson is deseloping his modelrefesstohis originlorkhon oanehonge model inFodios. Is this original exchonge model the goods are not ossomed So hove the ohorocteristic of joios onsumptioo, ond yet his onclosion is shot 'Be- mause she original opecifieotion of she secod moo's otility waos orbitrory, the finalquilibrium isolsoaritraryoadotoiqo.157The staement waos mode woith rempect to she "Edgeort~h hox onalysis," hot is foot the Somuelson modol is nothing 01000 than o peentaoion of Edgeworthioo onolysis swhere she quosity of goods ks sot flood hutsik limised So she vsriosus quanities thot could he produeed under She onditions of effi- cioey. The esistenco of the puhlic good is she model modiflms she oR- olysis hus does sot offect the notore of the cooclosions. Tho orbitrory statement of she second moo's utility is the coso0f she looge number of solutions is she model, and not she nature of she goods used is the model. Samuelson solved she pohlem of o lorge number of solosioshy uosing a welfoe fonetion foo sooiety. The srodisionol solotion so os Edgeweorth- ios onolysis, hoswever, is usually sosted is teoms of She relotive horgoin- ing poweros of the indiv-iduals inolved is she exchange. Prike theory follosws this troditionol foome of oefoeee io thot iocome derioed from the pooductisisy of resoores osed is pooduesion detoormines she horgoin- ing powoer of she individools involved is she exchonge. Is she next chopter on attempt is mode so onvert the Mosgoave-Somuselsoo model gro0 o puoe ehonge model sohich requires a woelfooe fonctionor 00n arbitrary stotement of hoogoining power of Sndividools so o model swhich rests on she poinciples of pokce theory. 16. "Pure Thee,0 of Pulio Espesditue." 17. Foundationo of Ecosomoic Anolysis, p. 238. 34 3 34  4. A SUGGESTED APPROACH Musgrave's criticism that there is no single optimum with respect to the voluntary exchange theory of public finance was rejected because the methodology used was not consistent with price theory analysis. It does not provide a single optimum when only private goods are used in the model. However, the Samuelson general equilibrium framework used by Musgrave has some merit. The problem is to modify the Musgrave-Samuelson model so that it is consistent with price theory general equilibrium anaylsis. The modified model then can be used with the restriction of a public good that has the characteristic of joint consumption in order to further evaluate the criticism of the voluntary exchange theory of public finance. The modified model may also be considered as a new approach to the presentation of the theory, which makes explicit some of its seldom stated conditions. THE TRANSFORMATION CURvE The Musgrave-Samuelson model starts with a given transformation curve. This curve is based upon the production possibilities of firms producing the two classes of goods in the limited society of the model. By assuming that one firm, or that one group of firms with identical production functions, produces each of the two goods, derivation of the transformation curve can be shown graphically.t It is assumed that all of the existing (given)2 resources will be used in the production process, and the determination of which firms will use the resources is to be de- termined on the basis of efficiency. It is also assumed, as in the case of Walrasian general equilibrium analysis, that the original distribution of ownership of resources is known (given).3 The combinations of X and Y (private good products) indicated by the transformation curve in Figure 15 are derived from the points of tangency of isoquants in Figure 14. These points of tangency indicate 1. Bator, "Simple Analytics of Welfare Maximization," pp. 3-24. 2. If the quantity of resources is not given, the transformation curve cannot be determined. 3. If the original ownership of resources is not given, there is no single best solution because the distribution of income in a market society depends upon the ownership of resources at the beginning of the productive process. This does not mean that the distribution of income is given. It is determinable with a market society and a given original distribution of ownership of resources. 35 4. A SUGGESTED APPROACH Musgrave's criticism that there is no single optimum with respect to the voluntary exchange theory of public finance was rejected because the methodology used was not consistent with price theory analysis. It does not provide a single optimum when only private goods are used in the model. However, the Samuelson general equilibrium framework used by Musgrave has some merit. The problem is to modify the Musgrave-Samuelson model so that it is consistent with price theory general equilibrium anaylsis. The modified model then can be used with the restriction of a public good that has the characteristic of joint consumption in order to further evaluate the criticism of the voluntary exchange theory of public finance. The modified model may also be considered as a new approach to the presentation of the theory, which makes explicit some of its seldom stated conditions. THE TRANSFORMATION CURVE The Musgrave-Samuelson model starts with a given transformation curve. This curve is based upon the production possibilities of firms producing the two classes of goods in the limited society of the model. By assuming that one firm, or that one group of firms with identical production functions, produces each of the two goods, derivation of the transformation curve can be shown graphically.' It is assumed that all of the existing (given)2 resources will be used in the production process, and the determination of which firms will use the resources is to be de. termined on the basis of efficiency. It is also assumed, as in the case of Walrasian general equilibrium analysis, that the original distribution of ownership of resources is known (given). The combinations of X and Y (private good products) indicated by the transformation curve in Figure 15 are derived from the points of tangency of isoquants in Figure 14. These points of tangency indicate 1. Bator, "Simple Analytics of Welfare Maximization," pp. 3-24. 2. If the quantity of resources is not given, the transformation curve cannot be determined. 3. If the original ownership of resources is not given, there is no single best solution because the distribution of income in a market society depends upon the ownership of resources at the beginning of the productive process. This does not mean that the distribution of income is given. It is determinable with a market society and a given original distribution of ownership of resources. 35 4. A SUGGESTED APPROACH Musgrave's criticism that there is no single optimum with respect to the voluntary exchange theory of public finance was rejected because the methodology used was not consistent with price theory analysis. It does not provide a single optimum when only private goods are used in the model. However, the Samuelson general equilibrium framework used by Musgrave has some merit. The problem is to modify the Musgrave-Samuelson model so that it is consistent with price theory general equilibrium anaylsis. The modified model then can be used with the restriction of a public good that has the characteristic of joint consumption in order to further evaluate the criticism of the voluntary exchange theory of public finance. The modified model may also be considered as a new approach to the presentation of the theory, which makes explicit some of its seldom stated conditions. THE TRANsFORMATION CURvE The Musgrave-Samuelson model starts with a given transformation curve. This curve is based upon the production possibilities of firms producing the two classes of goods in the limited society of the model. By assuming that one firm, or that one group of firms with identical production functions, produces each of the two goods, derivation of the transformation curve can be shown graphically. It is assumed that all of the existing (given)2 resources will be used in the production process, and the determination of which firms will use the resources is to be de. termined on the basis of efficiency. It is also assumed, as in the case of Walrasian general equilibrium analysis, that the original distribution of ownership of resources is known (given). The combinations of X and Y (private good products) indicated by the transformation curve in Figure 15 are derived from the points of tangency of isoquants in Figure 14. These points of tangency indicate 1. Bator, "Simple Analytics of Welfare Maximization," pp. 3-24. 2. If the quantity of resources is nut given, the transformation curve cannot be determined. 3. If the original ownership of resources is not given, there is no single best solution because the distribution of income in a market society depends upon the ownership of resources at the beginning of the productive process. This does not mean that the distribution of income is given. It is determinable with a market society and a given original distribution of ownership of resources.  the combinations of A and B (resources) that wcould be sed by the firms producing produts XandY uder theeffiiency condition that f n anmarket society evenmo~re caneousad fom the simpe deria- lion Hf the transfoermatioE curve. Under the conditions of pare orpe- tition in resour~ce msarkets and in product maorkets, the ratio Hf the mareginal productivities of the reources wcill lsfobeequal tothe ratio of the cOobinations of A and B (resources) that could hr used by the fiems producing products X and Y under the efficiency condition that fInamaket society een more can be said fromnthe imple deriva- lion of the transfornmation curce. Under the conditions of pore oope- tition in resource msorketo and in product moarkets, the ratio of the mnarginal prodtiviies of the resources will also be equlf to the ratio of the comobinations of A and B (resources) that would hr used by the firs peoducing products X attd Y under the effiiecy condition that M pPInoamarhetoociety een oore cas heosaid fromssthe simple deria- lion of the trasfoernotions curve. Under the conditions of pore comope. tition in resoorce snarkets aod in product mrokeets, the ratio of the marginal productivitiesoof the resources swilfl aobe equalfto the ratio of Hg Op~ P> O 0.O y He slps MPX y ~ T MP~a Oz t %P=P Os Slpe M ~ nP PA Figure 04. the prices paid to theesourcs; v eRYQ5rY. Since tho qantity of A and Bis gicen (Figuret14) and the ownership ofA andBis asumoed to he known, the ratio of prices paid to the resoorces detcrmins the distribution of inconse. The lccel of nsoney income is still indetrermi- nate, hut the distributian of any nmoney income level anmong the oswners of the resources is determined. The transformation comve, under the conditions of pure competition in the product maret, determines another important condition for equi librium in the marhet-price theory model. The slope of the transforma- lion curve is the ratio of the nsarginnl costs of produciog the twno foods a. Bator (pp. 31-32) e~ognizes this goint hut does ot assume Shot the orig- inalfdistrihutiooftthe ownership of rsurcrsisknownsand thus does otcrry the nalysis furthrr. 36 Figure 14. the prices paid to the resoures; Since the qantity of Auand Bis given (Figurert4) and theoswnership ofA and Bisussumed to hr hnomn, the ratio of prices paid to tbe resouresm determines the distribution of income. The level of money income is still indetermi- nate, hat the distribution of any money income level among the oswners of the resources is determined. The transformation curce, under the conditions of pure competition in the product markets, determines another important condition for equi. librium in the marhet-price theory model. The slope of the transforma- tion curve io the ratio of the marfinaf costs of producinf the two goods 4. Rntor (pp. 31-32) recognies this point hut does Hot assume shot the orig. inal distributionof theonrship of rersorcs isknown andthus does otocrry the analcsis furoher. 36 Figure 14. therprices paid to the rsourcms; Mr>nP Since the quantity of A and Bis given (Figurer14) and the osonrship of Aand Bis assumed to hr known, the ratio of prices paid to the resources determines the distribution of income. The feven of money income is stilt indetecrni- note, bat the distrihution of any money income level among the oswners of the resources is determined. The transformation curce, under the csnditions of pure competition in the product markes, determines another important condition for equi- librium in the market-price theory model. The slope of the transforma- tion curce is the ratio of the marginal cots ofproducing thetwo goods 4. Batoe (pp. 31-32) recogisl this point hal does not assume that the orig- inal distributionoft the ownrship of resources as kown and thus dorsot car thr asalysis furoher. 36  Since, untder pare comapetitions market conditiont, the price of the product is eqal to the maarginal cost of prodcing the product, the traneforsmation curse also determines the ratio of the prices of tite products ( v.).5This fixesthe relationship othevalue of XtoYhbt nsottherlevel ofthe money value of production. The comabination of X and Yindicatedby poit 1in Figure1canotenquiliriuma solution andr the conuditions of pure comupetitions. Girea the peodactian SSol=rMx r . ptat p 0 true Figure H4 54 0 X Fissare 15. of X and Y antd the relatioship of pricehbeteen X antd Y, the rela- tionship of the expeeditures hy fleets X tand Y is determinerd. This de- termied rlatioshipof expenditures for pointl1is, howver,icon- sistent swith the relatiotehip of espenuditures iadicatrd itn Figure 14. The inconsistrncy cusn hr seet amore clearly if the analytis is curried farther to coasider the demanud tide of the picture.' DEMANu ANALYSIS The distrihution of incomse ht eat the lerel of money income seas determsined its Figure 14 fur each cobinationt of X ansd Y that might 5. Bator, pp. 32-33. 6. Batoe wourks backwards from this point to shoe howu exchange swould taker place with the determned reltonship of valuelbetween X and Y. His sofution, hoarser, would cequire that cesrnue from one firm he redistributed to the other fium ar thut onerf0cm operate at a lust. 37 Since, under pare competition market conditiuns, the price of the peoduct is equal to the marginal coat of proucing the product, the transformotion sure also determintestshe ratio of the prices of ste products ( v,).5Thi fixe the relationship of thevalue of Xto Ybt nut the level of the money valurao productiot. The combiations of X and Y indicated hy point 1tin Figure 15 cannot be an equilibrium solution under the coaditions of pare competition. Given the production 6 true P.gc T1x 54 0 It Figure 15. of X and Y and the relationship of pricehbetween X and Y, the reln- tiontshi p of the expenditues hy firms X tand Y it determined. This de- trmined relationship of expenditures for point l is, homeser, incon- sistent mith the relationahip of enpenditures indicated in Figure 14. The incoasistency sun ho teen more clearly if the anulysis it curried further to consider the demand tide of the. picture.t DEMsA~ND ANALSIvSs The distribution of income hbut not the liee of money income was determined in Figure 14 far each combination of X and Y that might 5. Bator, pe. 32-33. 6. Batur wurks basckwards from this point to show how euchange would tae placenwith thcdeterminedsrlationshipofovaluebtees X andY.His soltion, howeve, woutd require that revenue from use firm he redistributed to the other finn or that ass fiun operate at a lass. 37 ( .Since, under pare sompetition market cuonditions, the price of the product is equal to the marginal cast of producinsg the product, the transformations carve alto determines the ratio of the prices of thte products ( ,").s This fixes therelationhip ofth valeof Xto Ybt not therlevel of the money value of production. The combination of X and Y indicated hy point 1 in Figure 15 cannot he ass equilibrium solution under the conditions of pare competition. Given the production Y ester astor Soe= ME5 .. Yt -s txe P MCy Sope=.& Ea l- bt pp lU 6 Py Orfi TEx fruom Figure 14 54 vt----- - - --- 0 X6 isnee 15. of X and Y and the relationship of pricehbetween X ansdY, the reln- tionship of the enppssditures hy firms X tand Y is detrmissed. This de- trmised relationship ssf expenditues for point 1 is, homever, isscon. sistent with the relatiossship of expessditures indicated in Figue 14. The inconsistency can he uean more clearly if the assalysis it carried further to consider the demassd tide of the picture.' DENsDn ANALYSS The distributions of income bust not the level of money incume mas determined iss Figure 14 forerash combinatios of X and Y that might 5. Bsstor, pp. 32-33. 6. Bator rksbsackwards from this paot to shoe how exchangerwouldtske place with the dtetermned retationship oftvaluetbtween X ansI Y. Hit suion, hoever, woutdcrequirethat reenue from onefirmbeedistributed tosthe othr trn or shot one 0icm operate sst a las.  be produced under t11e conditions of efficient production (i.e., foe each pRont on the transforematiRn curve). Un~dr the simaple Rasuption that is own~ed by individual B, and the determoined price ratiR of the prd- 5101s from Figore 15, the lieO of attainable coembinatiRo EaR ho shown foe the twR indiciduals. Thre ae a large number of each lines Rf at- taintable coombinatioso for eaoh efficiency otpot, depentding upRon the absolute pricespaid foresources A and B, as isshown inFigure 6fcor be produced undr theR conditions of efficient producion (i.e., for each point on the transfrmatiRR curve). Unader the osieple assumOptiona that aflofeoureoeA isowned by indiidal Aand that all of resorRe B Os osoned by individual B, and the dRtermlined prioR ratiR RI the prod- Rols froma Figure 15, the lines of attainable comRbinations EaR be shown for the too individuals. Thee are a lrge nuember of tucb lines of at- taioable com~binations for eaoh efiienRcy ootpot, dependiog uonR the aboolute prioces paid for esRoresO A and B, as is sownsu ino Figure 16 for be produced Roder thte condiions of efficient production (i.e., foreachR point on the transformoation curve). Under the simple assum~ption that all of reource A is oned by individual A aead Ehat all of eoure B is oswsed by iandividual B, and the detpermined peice ratio of the peod- Rols froma Figooe 15, the lioeo of attainable oembinaations oas he ohown foe the two0 individualo. There are a large onumber of sch lines of at- taioable conmbioationo foe each eflficency outpu, depeodiog upon tbe absolute pricespaid for eeeoues Aand B, asis soninFigure16 for Figue 16. point l and the teanofortoation cueve. Given the tasteo aead prefeeenceo for X and Y by individuals A and B, the points of tangency between the various lineo of attainable coembinatioos and the indiffeenoce cures deteromine the individaals' demnd for peodacts X and Y at the different mnoney incomeleeles. Demanda and acan besummed to obtain the total denmand. The summning of the various demeands foe X and Y at diffeeent money inconaes can be shown as a summantion of individual inconmeconsaenption lines and can he ouperiaoposed on the transfoe- enation carve diagranm (Figaee t7). The fact that the line of the sumn of the incomae conosumption linee does not intersect the teanofoeneation Figure 16. point l and the teanofoenmation cueve. Given the tasteo and peefeeencen foe X and Y by individuals A and B, the points of tangency between the vaeious lines of attainable combinations and the indifference caree deteemine the individuals' demand foe peodacts X and Y at the different money income levelo. Demands aA0 and aBcan beosummed to obtain the total demand. The saumming of the various demands foe X and Y at diffeeent money incomes can be shown as a summation of individual income conoamption linm and can he saperimpooed on the transfor- motion curve diagram (Figare 17). The fact that the line of the sane of the incomne consanmption lines does not inteesect the transfoemation 38 I 0 lna la XO1 Figuee t6. point 1land the transfoemation curve. Given the tastes and preferences for X and Y by individuals A and B, the points of tangency between the various lines of attainable combinations and the indifference carves determine the individuals' demand foe products X and Y at the different money income level. DemandsoaA and ascan be summed to btain the total demand. The oumeming of the cartons demands foe X and Y at different money incomes can be shown as a summation of indicidual income consamption lines and can he saperimposed on the transfor- mation carve diagram (Figure 17). The faot that the tine of the sum of tbe income consumnption lines does not intersect the tranofoemation 38  creat the point t ombination of X and Y indicates that there is no level of meoney inomsse with the distribution of incomue determsined by producing point toombination of X and Y unsder consditions of pure comopetition which will equate the demsassd aed supply foe produots X andf Y. Therefore, the comobination of X and Y indioated by point 1 ossdes the conditiosss of pore oompetition oan only be an equilibriumo solutioo if one of the firsus is subsidized sod the distri- bution of incomne is different frous that which is provided by the marbet. With the traditional ssumptions of price theory assalysis these wifl Y £L. o A.C. £ lCe lCL' sssisted with inoe distorimio ICUSsassocited wthincome distri- Y. __ butisn and product price ratio £ L.ofA.C. mine bytep cdiiote ea sed e set o p dse X assdupu Y . (Agso i shold s nted hatpos cometiion s ssumd iubot th product~~~~ ~~~ anIh muc abt sdteoiis wesi fts isur 17w..iue1 ls hw hssiueslto sml bfe othoe combinations of X and Y.wihcnb rdue fiinl anuhihewillppsdandtepswhenmcthe pisribstinteicotesdfthe prducand the pesource anfrkt padth. oina owbeshi anlyi the price ratio was given by the slope of the transformatiun curse. This price ratio is the only one which is cansistent with the ssunmptions 39 curns at the puint 1Icombination of X and Y indicates that there is no level of money income with the distribution of income determined by producing point i cmbinatiun of X and Y under coditions of pure cosmpetition which will equate the demand and supply for pruducts X ansd Y. Therefore, the combination of X and Y indicated by point 1 andes the conditions of pare competition van only be an equilibrium solution if ane of the firms is subsidized and the distri- bution of income is different from that which is pravided by the mashet. With the traditional assumptions of price theory analysis there will Y £L. o A.C. lijs I £u ICe ICL' assmited with income dinsistto m o coa ad prOout pr i tu fotropt 5,0e 01fA. £CUS assited with income distri- Y ---- i __ ationeadsproduct re ratio Id05' 1 £L.sf . C fa otput Y410X4 I I Figure 17. he only ane combination of X and Y which can he prosduced efficiently sod which will be demonded when the distribution of income is deter- mined by the praductivity of the resources used to produce X and Y. (Again it should be noted that pure colmpetition is assumed in bath the proeduct and thr resource markets and the original omnership of the rsucsis known.) Figure 17 also shows this unique solution os well as the inconsistency betweeo demand and supply which exists foe one of the other combinations of X and Y. Another approach to the problem canhe presented in termsuofthe demand foe product X and for productsY. In the above analysis the prior ratio was fives by the slugs af the transformation curve. This price ratio is the only one which is consistent with the assumptions 39 curve at the point 1 combination of X and Y indicates that there is no level of money income with the distribution of income determined by producing point 1 combination of X and Y under conditions of purr competition which will equate the demand and supply for products X and Y. Therefore, the combination of X sod Y indicated by point 1 under the conditions of pore competition can only he an equilibrium solution if one of the firms io subsidized and the distri- bution of income is different from that which is provided by the market. With the traditional assumptions of price theory analysis there will Y £L.of AC. Ii~o IC ICL aocmiatwitho incoe distribton ILofA. a IU omeascae) ihicm iti Y5 -.--- 4, -- buta sanid0, prodact price ratio £ L.of AC.Co sa to 0 Pig 7 be oly ne umbnstin o X nd whih cn h prduce eficintl sewurces ~ ~ ~ ~ Fiur is17.)Fgre1 losos hsuiu lta swl ofe oth oe combinations of X and Y.wihcnb rdue fiinl (Aanthuapproachted tht prem canmeio prsntsed in emsoh the demand foe product X and for product Y. In the above analysis the price ratio was given by the slope of the transformation curve. This price ratio is the oaly one which is consistent with the assumptions 39  made about the markets involved. How~ever, the price ratio is just the priceof each goodt eqilibriun a demand cHuv for both goods still exists. Thsist~ead of uing inomeosum~sption linsesthe anal- ysis could be bated uSpon price consumption lins. Figure 18 shos made about the maraskets involved. Howeaver, the price ratio is just the price of eachgood atquilibriumaand ademand cHrve for bothgoods still enists. Thus instead ofausing incomeoonsumpion lis thenl- ysis cHuld be basled upon price consumtption les. Figure 18 showsI maede about the mlarkets involved. Hoever, the price ratio isjust the price of each goiod at equilibrium anad a deman~d curve for both goods still exists. Ths insIPad of using incomeI consumnption lines the anal- ysis could be based upHn price consumIption linsse. Figuree 18 thows V Individual A Pa H Ii Ii I. P1 P1 P1, V Individual B Pa PCL' I Ii' I, Ii P1. P I Individual Aedvd l B I, 0 I, Ii U, C, C, C P P ~ P %a x2 % C, Pa PCL' YV Indiidul Ale iol B Py H x P, , U, i C , C PC L' P1a P1z Px . E PC ^' PC C1 E ia FigCre 18. the usual development of price cnsumption lines for the twvo indi- vidualsoAoand8B. These individual privc onasumEptionies Bare stummeHId (i.e., the comobinationa of X and Y desired by A with the samel given price of X and Y iadded to thecombination of X and Y desired by B w~ithI the same given price of X and Y). The point w~here the suammed price consum~ption line intersects the transforma~tin cNuv gives a Figure 18. the usual developmaent of pricevconsHumption linecs for the two indi- viduals Aand B. These intdividual pricevconsumaption tines are saammed (i.e., the comabination of X and Y desiried by A with the satme given price If X and Yis added to thevcombiation of X ad Y desired by B with th~esame given price Hf X and Y). The point whereP the summeId pricecosumpion line intersects the transform~ation curve gives a 40 Figuta 18. the us1a1 development of priceosumsption lines foe the 1100 iadi- vidualsA and B. Th~ese individua priceonsIumptio lnes are summed (i.e., the comebination of X and Y deoired by A sithithe samne given price of X and Yisodded to theomabination of X and Y desired by B soith the samne given price of X and Y). The point wohere the saammted priceconsumaption lisle intersects the transfortnation curve gives a 40  A SUGCESTED APPROACH possible equilibrium. Whether or not it is an equilibrium solution under conditions of pure competition can be checked by summing the indifference curves of the two individuals. If the summed indifference curve is tangent to the transformation curve at the point where the summed price consumption line intersects the transformation curve, it is an equilibrium solution. The distribution of income must be given in order to use price demand analysis, but this is no problem since the income distribution was determined. In fact, as developed earlier, the equilibrium solution is known before the analysis is started. The price demand analysis merely adds one more consideration. It is an A SUGCESTED APPROACH possible equilibrium. Whether or not it is an equilibrium solution under conditions of pure competition can be checked by summing the indifference curves of the two individuals. If the summed indifference curve is tangent to the transformation curve at the point where the summed price consumption line intersects the transformation curve, it is an equilibrium solution. The distribution of income must be given in order to use price demand analysis, but this is no problem since the income distribution was determined. In fact, as developed earlier, the equilibrium solution is known before the analysis is started. The price demand analysis merely adds one more consideration. It is an A SUGCESTED APPROACH possible equilibrium. Whether or not it is an equilibrium solution under conditions of pure competition can be checked by summing the indifference curves of the two individuals. If the summed indifference curve is tangent to the transformation curve at the point where the summed price consumption line intersects the transformation curve, it is an equilibrium solution. The distribution of income must be given in order to use price demand analysis, but this is no problem since the income distribution was determined. In fact, as developed earlier, the equilibrium solution is known before the analysis is started. The price demand analysis merely adds one more consideration. It is an Figure 19. important consideration later when the model is used with one private and one public good. The single "best" solution derived in Figure 18 does assume that pure competition exists in both resource and in both product markets. If pure competition does not exist in the markets of both products, the Pareto optimum will not be achieved because there is no market force to cause the ratio of prices to be equal to the ratio of marginal costs (i.e., the slope of the line of attainable combinations would not have to equal the slope of the transformation curve at equilibrium). Figure 19 shows the three possible situations. Point A indicates a situation where the price of X is greater than the marginal cost of producing X. Point 41 Figure 19. important consideration later when the model is used with one private and one public good. The single "best" solution derived in Figure 18 does assume that pure competition exists in both resource and in both product markets. If pure competition does not exist in the markets of both products, the Pareto optimum will not be achieved because there is no market force to cause the ratio of prices to be equal to the ratio of marginal costs (i.e., the slope of the line of attainable combinations would not have to equal the slope of the transformation curve at equilibrium). Figure 19 shows the three possible situations. Point A indicates a situation where the price of X is greater than the marginal cost of producing X. Point 41 Figure 19. important consideration later when the model is used with one private and one public good. The single "best" solution derived in Figure 18 does assume that pure competition exists in both resource and in both product markets. If pure competition does not exist in the markets of both products, the Pareto optimum will not be achieved because there is no market force to cause the ratio of prices to be equal to the ratio of marginal costs (i.e., the slope of the line of attainable combinations would not have to equal the slope of the transformation curve at equilibrium). Figure 19 shows the three possible situations. Point A indicates a situation where the price of X is greater than the marginal cost of producing X. Point  C indicates a situation where the price of Y is greater thac the mar- gical cost of producing YJv Point B tndicatesthlie Pareto opltimum pesected in Figuce 18. It is appaent that thece Ore OR infinitt number of Rolutiont, depenedintg uone the speoifio maeket tituations which mtight ecisti However, it it Rely whec poe cotmpetitioR eajsts that the lice of the tsumo of the individual price consutmption lieO icteetects the transfoermation cucve at a poiot whcere the curve of the tstm of the individual indiffeccence carves it taegent to the tcanformoatioR ceeve. Whec any other type of marcket situation exitso in the prodact mareket of either good, the price of the good it greater Iliac the mareginal coot. Thecefoee, the polio of peicet (i.e., the elope of the atoainahle cam- binatioca acd the etope of the individuoal inedifferencce cures ohea the icdividualeeaeimizeeesatisfaction) cancot equaltheeratioaofcmargical coete. ft ehoold alsa he ceted that the icome dieteihotion hat cat heec altered eee thoagh the elope of the lice of attaicahle cotcbinatioc it diffecent fcomc the elope of the tratnsformeationcuoave. In other woede, if the ratio of prices does cot hae to equal the patio of mareginaleeot, the iccome discihatioc doee cot deteccmice a unique eqilihrietm. It wcould alto he difficult to thaw graphically that the "coceect" dietrihutioc of incomce hat been cmaintained. The elative value of the two goods it diffetect if pace cocmpetitioc de o wt eoist. The eupply of the good told ucder cocditioce othee than puee comcpetition it ceteicted, acd its price it highec thac it would hove heec if pueecompetitioc hod existed.Also excess profitewill existtacdwouldhave toeditited in esoee maccec. Therefoce, the ahtence of pate comepetitioc may ceate ancincome feedbcac problem andthere mayhbeo eqiibiumol- tion. Ac equiiriumot solution may exiethbut it need cot exist hecause of the distrihution of the excese profite in the tyttem. DEMAND ANAL-YSte WtTH A PUBLIC GOD The changes cecetsacy ic the model to cocsider a puhlio good with the characteistic of joint consumption ace minor. The existecce of a equiliheium it cot changed, even though the equiliheium level it changed.t The dietrihutioc it etill determinced hy the teiginal onr 7. Inhoth siuatonsiet iciasoued tha the price othe oehetgood inthetit. ationtisequal to tleeemartinal cosof peoducing the goed. 8. The onficie towhee ot tolations here ae net the sace at those ohich exist inetheMusgrave-Samuloomodel. Thereeapecificsluonedependstupon the hortoinint power of the individala because it onvoles a harcec exchace of tood. to chit modified mcodel a specific solotiaon depeonds uon the caeot situationtewhichmeassucedtto eist inothewmarketecoomw. 9. The diffcoence io the two equilihbriucs is the topic of the neatscin 42 C indicates a situatioc where the price of Y is greater thee the mar- ginal cost of producing Y.' Point B indicates the Paceto optimum peented ic Figuce 18. It is appacent that thee ece anc infinite comher of solutione, depending uon the specific macket tituatione which might etit However, it it ocly when puee competition exiete that the lice of the tam of the individool price consumption linee inteetects the transformationocucve at apoint whece the cucve oftheoum of the individual indifference curves it tangent to the tranformation cate. Wheany otheretype ofmarketeituationceiststinthepodct maret of either good, the price of the good it greater thee the marginal cost. Thecefote, the catio of prices (i.e., the dlope of the atoainahle om- binationt tand the elope of the individual indifference cocvms whew the icdividual maimizeeeatisfaction) cancoeequal theeratio ofmarginal coete. ft ehoold elmo he noted that the income ditrcihotion hat cot heec altered eveR though the elope of the lice of attainable comchinatioc it diffeent fcom the elope of the traceformation curve. In othee woreds, if the patio of prices does cot have to equal the catio of moarginal caste, the income distrihutiac doet cot determine a uniqot equilihcium. It would alto he diflicult to ehow graphically that the "corcect" dietrihutioc of iccome hot heen maintained. The celative volue of the two goods it different if pace competitioc doet cot extist. The tupply of the good told undec cocditiocs other thee pace competition it cetrioted, ted its price it highec than it would have heec if pace competitioc had existed. Alto eccems peofite wilt exist acd would have to he distrihuted tn ome manner. Therefoe, the absecce of pue competitioc may create ow income feedback problem and there may he no equilihrium talu- lice. Ac equilibriumc solution may existhbut it teed cot extist because of the distrihutioc of the excess profits it the tyttem. DEMeAND ANALYSIS WITH A PEBLIC GOOD The chacges ceceteary ic the model to coceidec a puhlic good with thevcharacteristic of joint cocsumption ace minor. The existecce of a equiliheium it cot chaoged, even though the equiliheium level it chacged.t The dietrihutioc is tll determined hy the origical onr 7.Inthd sitaiosit isasumed that thecprice ofthleotherttood inthe itu- tiontiseqaltcohcecmagiealcostsofpoducing the god. 8. The infinite nuohee of tolutions hete tre cot the sace astchoe which exist it the Musgrave-Samuelson mcodel. Thee, a specific solution depends upon the haraoiniog power of the individals becase it inolem a hartec exchange at tood. to chit modihied mcodel a specific eolacion depeede apot thy matehet situatiocotwhichaecassuedtoexis inethewarhketecoomwy. 9. The difference ic the two equilihriumo to the topic of the coat teetioc. 42 C indicates a situation where the price of Y is geatee thac the mar- ginal cost ofpoducing Y.tPoitidicatoeshe Paetooptimm peented in Figure 18. It isappacect that there ace ac icfinite numethe of soltone, depecding opoc the specific macket tituatioce which might existst Howevec, it it only when pate competition exiete that the line of the tam of the icdividual price coneemption linee inteetects the tracsfoemationccve atoapoict whececthe curveof thesum of the icdividual indiffecence corves it taogect to the tracformationcrve. Whec acy other type of market situatioc exits in the product market of eithee good, the price of the good io greater thac the marginal cost. Thecefore, the patio of pricee (i.e., the etope of the attainahle com- hicatiocs acd the dlope of the icdividual icdiffececce curem whec the icdividual maimiesatisfation) cancot equalthecratiof mrginl costs. It ehould elmo he coted that the income ditrihotion hat wet heec altered eveR though the elope of the lice of attainahle combeicatioc it diffecene team the elope of the tcaceformatioc ocve. In othec wtords, if the ratio of prices does cot have to equal the ratio of maegical cot, the income distcihetioc does cot determine a unique eqiihcium. It would alto he difticolt to ehow gcaphically that the "coccect" dietrihutioc of income hat heen maintained. The celative value of the two goods is differect if pace competition does cot exist. The scpply of the good told ucder cocditions othec thac pace competitioc to ceteicted, acd ite pcice it highec than it would hove he ec if pace competition had existed. Alto excews profits wigl exist acd would have to he distcihuted tn ome maner. Theefoce, the ahence of puee competitioc may create ancincome feedbackhprolemand thereemayhbecnoeqiliiumtol- tioc. Ac equilibriumo solution may exit hut it need cot extist hecatse of the distrihutioc of the exceet profits it the tystem. DEMANDO ANALYSIS WITH A PEBLIC GOOD The chacges cecessary in the model to considec a puhlic good with theecharcteitic of joint consumption ace minoe. The existence of a equiliheium it cot changod, eveR though the equiliheium level it changed.t The distcihution to etill detecmined hy the oeiginal onr 7.In both oitutaiosotistoaosuedthtthcriceof thtotherttood intheitu- ation istequal to thewearginal 00st101 peodacint the good. 8. The initee nuwbee ot tolacios here ate cat t he eame at theo which pait to the Masgrave-Samelono model. Thee, apecific solutioo depeedt upon the haatiin poer of the ieditiduels hecause it inoles t hartec etchoege of tood. to chit modied wodel a tpecific soluetion decends apontche maeehet situations which aee atsumed to exit it the oathkcc ectonow. 0. The diffeence inc the two equitlibriums it the topic at the nextscin 42  ship of the resources and the prices paid to the ownsers of resourceo based upon their use in the production of the two goods. The govern- ment can be assumed to purchase the resources they ute under the consditions of pure comspetition in the resource macbet. The other assump- ship of the resouces and the prices paid to the owners of resources hated upon their ate in the production of the too goods. The govrn- muentcanhe asumoed topurchae theesouces theyuse underehe conditions of pace competition in the resource ssarket. The other assaump- ship of the resources and the prices paid to the oscners of cesources hased apon ther use in the production of the twso goods. The govern- ment caaheassumed topurchase theesouces they usesundee the conditians of pace comapetition in the resurce teachet. The other assansp- Yy Individual A Idvda Y Individual B 5 PCL" I. D 8 D Public Good YY Individual A ldodo CPublic Good Pulo od Y Indioidual A Public Good Y Individul B DPublic Good Figure 20. tionts swhich are necessary for a demnd analysis ace that individuals do issomsescay eprss theircdemad forcthe public goodasscellos the private good ansd that the goserntment collects thr tours hosed upon the eopressed drmancd. Figure 20 is the diagrasssatic pcesrntation of the detecmnation of the Pareto optimum allocatios ofeoces with ooegood defined as a 43 Figure 20. tions which ace necessacy fcr a dremand analysis ace that indisiduals do is somnesway exprss thrc deusand for therpublic good asswell us the private good and that the governmnset collrects the tours based upon the espressed dremand. Figure 20 is the diagrammsatic prsrntation of the determsisation of therPareto optimum allocaion ofcreorces swith onergood defined as a 43 Figue 20. tions which are necrssacy for a drand analysis are that individuals do in some souy express their demand for the public good as well us the private good and that the govrnm ent collects the toxes based upon the rxpressed demand. Figure 2G is the diageanatic preseutation of the detrmination of therPareto ptisum allocation of reorcs with onergood definrdas a 43  public good. The toethodology teed it bosically the tateR at in Figure if whetn both goodo toeee private goodt told in the tmtreet. The pee- eedttee foe the developmenet of the individual pokce contumption flnet it Rot chonged by the faot thot one of the goodt to o public good. Hoto- evr, hecause of the change it the defintion of one of the goods, the peooedutee foe sttutmting the peioe conetumption oures muttst he choeged. The comboination of the two goodt detied by inedividoal A, twhen he muost toke agiven quantity of the poblio good, it odded to the cotbino. tieR of the too goods detieed by individual B, whet he moust teke the flaOR gife quantity of the pobio good. This ohoege it procedure it jutthechange tooa eticl smmtionofdemantd cures fromthe hori- zontltsummattioenormallyoused intthe pivtegoods odel.tm The qoaetity of the pohlio good it held cototot and the demtand foe the two goods it summted, tobereas before, the price of X toot hold cont- stant and the demantd foe the twto goodstt wastsumed. The ittereetion of the lioe of the sum of the peiceoosutption liese oith the teansfortmotione ourve peooides tbe Poeto equilibriotm to log to the curve of the summaotion of indiffereneoreseis tangent to the transformattion oueve."t The samte bosio coeditiote foe geterti equilibriutm ted foe the Poreto optitoot allocotion of esoures hove beet moet with a pubio good ino the mtodel os with just private goods. The morbet coneditieonsoctnnot be aetstmed to foece the ollotation of resoorcee tooted the optimom siece tee good it a pobboc good, hot thistdoesttotentht suhaigle optimumodoesot eit.The governent woold hate to ondulge it peiee disoeiminttioo io thesee that the too individualt would tot pty the setme price foe the pohbloc good. Indieiduol A mill poy foe the publio good io aocordanoe with the prce ettio gien by the 3C lioe of atteitable comtbiootions, tod it. dieidual B oill pay foe the poblic good it acordaoce with the price ettio gieno by the 5D bene of attainable oombinttions. Thie, of coorse, it simply taxttito booed uon the betebit thetey of taxtiton, wheee the inodividool detecoites the benefit prteided by the poblic good. t0.The vertieal esummation of dotted cures oben a poblic Rood hoe the chareteitict of joint consumption toe deoeloped be Boten, "Interpeetatiot of Votiog it the Atloctiton of Ecoooio Hesources." It. The toothed of etmmieg todiffeenoe otres ie the saelte t hat teed by Sameoneo. The diffeeoce betowee the methodotogy teed hete ted Sameonos it thot the modified oodel employe the price consuomption lies of iodividutls to detertioe the iodiffeee c ooes ohioh. tee to he euooed eather thee using the arbitrare. placement ofta combination of the too goods on one iodividual ted pee- mittieg the other inditiduol to toeiwie hte ettisftction. The modified model lot. tote matee antlyeis, the Samtuelmen foltowater texchenge otalysie. 44 public good. The tmethodology teed it batietlly the samee to it Figue if ohet both goodo wece prieate goods told it the marehet. The pro- ceduee fee the deelopmoent of the iodividoal pole consumeptiot lioot isteethanedby the fatthaoe of the goodt ittapblio good. How- eer, hecause of the change it the definition of ote of the goods, the peocedere fee tumming the price coonotmptiot coret mut he choeged. The combitatiot of the two goods desired by iedieidool A, ohet he mcoet toke a gien quottity of the public good, it odded to the combioa- tion of the two goods deeied by indieidual B, whet he tmust toke the tome gieno qoottity of the public good. Thi change it procedoce it jutttheehangetoa eticlsummtion of demand cores from the hoi- zontal summation enermally teed it the private goods motdel tt The qoantity tfithe public good it held coetont ted the demaod foe the to goods it summed, wheeas befoe, the pokce of X woe held on- stant and the demand foe the two goodsot waosmmed. The ictecsection of the flone of the etm of the priceeconstumtption lines with the transformation cueve provides the Pareto eqoilibrium to loeg to the curve of the tommatioc of indiffeenececuresis tangent to the transformation ocre.t" The tome botic coeditiote foe geeral equilibeitum ted fee the Poceto optimum ollocotike of resoucem have beet met with a public good it the model as with just private goods. The moeket coedititeesocnot be oteomed to foece the ollocation of cesoucest tooted the optimum tineone good it a publio good, bet this doms tot mete tht etch a tingle optimum does tot exit. Tbe goereemeet woold have to indul go io peice dieceimiettiot it thesee thee the to individuals would eot poy the. tome price foe the public good. Iedividool A will pay foe ehe public good it occordeece with the price ettio given by the 3C lite of ettoitoble cominetione, ted it- dividual B will pay foe the poblic good it accoedooce with the prico rttio given by the SD fit0 of ottoitebte combinotione. Thie, of cooree, it simply txatiot based upot the benefit theoey of tatation, where the indieidual determitee the beeefit prteided by the poblic good. 10. The vertocal eutmonte of demand tcree thee a pubc good hae the characteristic of ioiot coneumctioe coo deeoped hy Boten, "Ieterpetotiot ef Voting to the Allocatioo of Economic Reeoure." 11. The method of eutmieg tndifference curvem it the eeme te thee teed by Satelseoo. The differeoce hetteet the methodology teed hete otnd Samueesen'e is thee the modified model employe the price coteumption lies of inditidoole to determioe the tndifferece curoes which ae to he etmemed ether thee using the arebitrtry placement of a comhination of the two goods on one individual ted per. mietiet the other individoel to maxtmizo hit setteftction. The modified model fl- tote market antlyeie, tho Somuelsoe foltowt bateexechaoge antleste. 44 public good. The methodology oted it boticolly the tome to int Figue 18 oboen both goode wece peieote goode told it the merket. The pet- cedure foe the deefopmett of the iedividool peice consutmptiot lioot it cot choeged by the foot thot tee of the goodt it a publkc good. How- ever, because of the chaege it the deftnitiot of one of the goods, the proceduce foe sumtminog the priceonsueemptionocurem mot he cheeged. Tbe combiettiot of the two goode detired by iedividtal A, when he meet tobe a givee qoattity of the public good, it odded to the combio- tiot of the two goods deeired by itdieidual B, whet ho muttaloe the tome gieno qoutntity of the pueblic good. Thie ohone ie procedure it just theechatgoto aoeretical summattione of demandectrtee from the hoof- zoetol summatioe etemolly toed ie the privote goods model~tt The qooantity of the poblic good ie held contanttt ted the demoed foe the two goods it summed, wheeasbefore, the price of X wos held con- staetoendthe dematd forthe twgoodswasesommed. Tbhe itesection of the ine of the sum of the peicecctnsomptiot iet with the transformation cueee peovidee the Paeeto equilibriumo to lotg te the curee of the etummation of iediffeentce cureseis tenget to the transfoematiotn crve." The tome botic cottditions ftor geneeal eqtilibritm and foe the Pareto optimtm ollooatiot of resotrces bae been met with a public good in the model ae with just prieote goods. The morket otditionse caenot be oteomed to foece the ollocotioe of cetourecee tooted the optimom sineeone good it a pobio good, bet thit domscot meanthtschaeigeopimm doesoteit.The goerement woold bae to iodolge ie peice discriminatioo ie the ee thee the two iedividels wotld cot pey the tome price foe the ptblic good. Indieidual A will pay foe the peublic good it accordone with the price etio givec by the SC lite of attainahle combiotion, tod ino. dieidual B will pay fee the peblic good ic occoedoce with the price etit givec by the 5D line of ttoieable combiottioce. This, of coeree, it simply tatation booed uon the benefit theory of taxationo, whee the icdividoal determiem the beoefit prteided by the public good. 1t. Theertictl etumoatiot of dotted curvee thee e public good hts the choracteristic of ioint coneumtioe toe detetoced hy Boe, "Interprettion of Votiog it the Allocation of Economic Resoce." tt. The mtethod of summitg iodiffeence curvem it the eame Rs thct teed he Samoeleot. The diffeceoce hetteenthde methodology teed here ond Samuelson's ie ehat the modified modet emptoes the price consuetion toots of tndividuats to deteemine the indiffereccuroces which toe to he eooced rathet thtn usiog the arebitrary placement of a comhiotion of the too goods ton tee individuot aod per. mittieg the other individuael to maetmite hit ettiefectio. The modified model fl- fete morket anotyeie, the Stamtelson foltoto hem ee etcheote anttlie. 44  COMPARISON OF THE EQIUILIRIUMS Despite the timtilarity of the analyses and the foot thot a tingle optitmumt exsts in eooh anoalysio, the optimumt allocation of Figore 18 is differet froms the optimum aa llocationt of Figure 20. The difference COMPARISON OF THE EQUILIBRIUMS Despite the timoilarity of the onolyses atnd the foot Shot a tingle optimumt exsts in each analytts, the optimum allocation of Figue 18 is different from the optimumo allocation of Figure 20. The diffeenoce COASaON Or TOE EQUILIBRIsUMS Despite the similarity of tho analyses ood the foot thot a tingle optimum exists in each analysit, the optimum allocation of Figore 18 is different from the optimum allocation of Figure 20. The difference x X X Figure 21. is shoscn in Figure 21. It is cased hy the fact that the summation of iacomerconsumption lines must also he modified schen a puhlic good exists in the model. The price demaond for the twco goods is hosed upon the vertical summation of demand cres. Thernforethe income de. mand foe the two goods mast also be hased upon a vetical summation of the inodividoal iacome cosamption lines. The difference in produc- 45 Figuee 21. is showcn in Figaro 21. It is roused hy the foct that the summation of income cosumption lines must also he modified swhen a puhlic good exsts in the model. The price demond for the tswo goods is hased upon the vertical asmation of demand cure.Therefore, theincome de- mood for thetwco goods mast also hehbased upon a vertical summation of the individual income consumption lioes. The difference in peodar. 45 Figue 21. is shoswn in Figure 21. It is caaaed hy the fact that the summation of income consumption lines mast also he modified ohen a puhlic good exists in the model. The price demand foe the two goods is hosed upon the verticalasmmation ofdemandcres. Thereforethe income de- mand for the two goods mast also hehbased upon a ertical summation of the individual iucome consamption lines. The difference in produc- 45  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE tion does also cause a difference in income distribution, but there is still only one distribution of income which is consistent with the as- sumptions of the model. The difference in production and distribution of income is the logical result of the one good in the second model having the characteristic of joint consumption. If the private good X in Figure 18 was private protection, the logic of the difference in production may be put in words. For protection to have the characteristics of a private good, it must be assumed that the resources used to protect individual A cannot be used to protect individual B. Thus, individual A hires protection but will not permit the protection to be used to protect individual B. Individual B does the same thing with the protection he purchases. The result is that both individuals (A and B) can purchase their protection at the same price and each will only purchase the quantity he wants at that price. The public good in Figure 20 can also be considered as protection. The difference in the analysis results from the fact that individual A is willing to permit the use of the same resources for the protection of individual B. Likewise, individual B is willing to permit the use of the same resources for the protection of individual A. The result is that the good protection takes on the characteristics of a public good with joint consumption. Less units of protection can be produced in the second case because the same units are provided to both individuals. If less units are produced, less resources will be used in the good's production. If less resources are used, less total expenditures will be made to whoever is producing the good. Thus more income is available for the purchase of the private good, and more total expenditures will be made to the firms that produce the private good. Both individuals may pay less for the public good protection than they would for the same quantity of the private good protection. The individual who owns the resource which is relatively more productive in the production of protection will lose income relative to the individual who owns the resource which is relatively more productive in the production of the other good. In either case the distribution of income is determined by the original ownership of the resources and by the productivity of the resources used to produce the goods which are demanded. It is simply that less units of protection will be demanded if it is publicly supplied because the same units can be consumed by both individuals.sa The individuals 12. The individual's demand is not afected by the way in which the good is supplied but the total demand or market demand is afected. THE PRICE THEORY OF VALUE IN PUBLIC FINANCE tion does also cause a difference in income distribution, but there is still only one distribution of income which is consistent with the as- sumptions of the model. The difference in production and distribution of income is the logical result of the one good in the second model having the characteristic of joint consumption. If the private good X in Figure 18 was private protection, the logic of the difference in production may be put in words. For protection to have the characteristics of a private good, it must be assumed that the resources used to protect individual A cannot be used to protect individual B. Thus, individual A hires protection but will not permit the protection to be used to protect individual B. Individual B does the same thing with the protection he purchases. The result is that both individuals (A and B) can purchase their protection at the same price and each will only purchase the quantity he wants at that price. The public good in Figure 20 can also be considered as protection. The difference in the analysis results from the fact that individual A is willing to permit the use of the same resources for the protection of individual B. Likewise, individual B is willing to permit the use of the same resources for the protection of individual A. The result is that the good protection takes on the characteristics of a public good with joint consumption. Less units of protection can be produced in the second case because the same units are provided to both individuals. If less units are produced, less resources will be used in the good's production. If less resources are used, less total expenditures will be made to whoever is producing the good. Thus more income is available for the purchase of the private good, and more total expenditures will be made to the firms that produce the private good. Both individuals may pay less for the public good protection than they would for the same quantity of the private good protection. The individual who owns the resource which is relatively more productive in the production of protection will lose income relative to the individual who owns the resource which is relatively more productive in the production of the other good. In either case the distribution of income is determined by the original ownership of the resources and by the productivity of the resources used to produce the goods which are demanded. It is simply that less units of protection will be demanded if it is publicly supplied because the same units can be consumed by both individualsa The individuals 12. The individual's demand is not afected by the way i which the good is supplied but the total demand or market demand is affected, 46 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE tion does also cause a difference in income distribution, but there is still only one distribution of income which is consistent with the as- sumptions of the model. The diference in production and distribution of income is the logical result of the one good in the second model having the characteristic of joint consumption. If the private good X in Figure 18 was private protection, the logic of the difference in production may be put in words. For protection to have the characteristics of a private good, it must be assumed that the resources used to protect individual A cannot be used to protect individual B. Thus, individual A hires protection but will not permit the protection to be used to protect individual B. Individual B does the same thing with the protection he purchases. The result is that both individuals (A and B) can purchase their protection at the same price and each will only purchase the quantity he wants at that price. The public good in Figure 20 can also be considered as protection. The difference in the analysis results from the fact that individual A is willing to permit the use of the same resources for the protection of individual B. Likewise, individual B is willing to permit the use of the same resources for the protection of individual A. The result is that the good protection takes on the characteristics of a public good with joint consumption. Less units of protection can be produced in the second case because the same units are provided to both individuals. If less units are produced, less resources will be used in the good's production. If less resources are used, less total expenditures will be made to whoever is producing the good. Thus more income is available for the purchase of the private good, and more total expenditures will be made to the firms that produce the private good. Both individuals may pay less for the public good protection than they would for the same quantity of the private good protection. The individual who owns the resource which is relatively more productive in the production of protection will lose income relative to the individual who owns the resource which is relatively more productive in the production of the other good. In either case the distribution of income is determined by the original ownership of the resources and by the productivity of the resources used to produce the goods which are demanded. It is simply that less units of protection will be demanded if it is publicly supplied because the same units can be consumed by both individualsa The individuals 12. The individual's demand is not affected by the way in which the good is supplied but the total demand or market demand is afected. 46  A SUGGESTED APPROACH are motivated to express their demand for the public good because, even though they may be discriminated against by having to pay a higher price for the same protection provided to some other individual, the price they pay may be less than they would have to pay if they purchased the same good as a private good. However, the problem still exists that once it is determined that protection is to be supplied publicly, each individual may benefit by not expressing his true de. mand for protection. The danger is that if everybody tries to conceal his demand, the good will not be supplied publicly, and then all in- dividuals end up paying more for the good than they would have if they had revealed their true demand for the good as a public good. This explanation of the difference between protection as a public good and as a private good also gives a basis to the paradox that, when asked, people want the government to provide more and more services but want to pay less and less taxes. Such a position is en- couraged by the separation of the decision-making process into two parts. This consideration, however, borders on the topic of the next chapter: the criticisms of the application of the theory to the political process. A SUGGESTED APPROACH are motivated to express their demand for the public good because, even though they may be discriminated against by having to pay a higher price for the same protection provided to some other individual, the price they pay may be less than they would have to pay if they purchased the same good as a private good. However, the problem still exists that once it is determined that protection is to be supplied publicly, each individual may benefit by not expressing his true de- mand for protection. The danger is that if everybody tries to conceal his demand, the good will not be supplied publicly, and then all in- dividuals end up paying more for the good than they would have if they had revealed their true demand for the good as a public good. This explanation of the difference between protection as a public good and as a private good also gives a basis to the paradox that, when asked, people want the government to provide more and more services but want to pay less and less taxes. Such a position is en- couraged by the separation of the decision-making process into two parts. This consideration, however, borders on the topic of the next chapter: the criticisms of the application of the theory to the political process. A SUGGESTED APPROACH are motivated to express their demand for the public good because, even though they may be discriminated against by having to pay a higher price for the same protection provided to some other individual, the price they pay may be less than they would have to pay if they purchased the same good as a private good. However, the problem still exists that once it is determined that protection is to be supplied publicly, each individual may benefit by not expressing his true de. mand for protection. The danger is that if everybody tries to conceal his demand, the good will not be supplied publicly, and then all in- dividuals end up paying more for the good than they would have if they had revealed their true demand for the good as a public good. This explanation of the difference between protection as a public good and as a private good also gives a basis to the paradox that, when asked, people want the government to provide more and more services but want to pay less and less taxes. Such a position is en- couraged by the separation of the decision-making process into two parts. This consideration, however, borders on the topic of the next chapter: the criticisms of the application of the theory to the political process. 47 47 47  5. TAXES AND THE POLITICAL PROCESS T hereearetwobroad categories of pacticl citicisminoling tones and the political process. They ace practical criticinms he- canoe they do not qutestion the logic of the thory itself, hot eothee question its application to the cool woeld. The firtt criticisma istthot taxenarecompulsory paymentsoand cannotheconideedonalogous to prices in the morket. The second ceiticiom is thoc the politioal organization of society aots in a uniquescay and cannothbe considered analogoat to the morket moechanistm. Both of these ceiticiosms ace im.- plicit in E. RI. A. Seligman's hittory of tanation.t He presents the history of taxation asoan evolutionaey process, moving feomn the voluntory con- trihutiont to teihal chieft to contpulorey payments (sach as direct taxationhby a centcal goerenet) .a It cannot he denied that the hittoey of taxation dones indicate that there have been elemntnof coercion in taxation in the real world. This is as tone ahout the paymentn to trihal chiefs as ahout dicect taxation hy a central governmoent. Ta appeoach the two ceiticistos logically, it ioneceosaeytooseparate them. Tanation only existt when apolitical organitotion enists, hot the flett criticism implies that taxet ae cam- pulsory pee se, no mactee what form of political oeganioation exitt. That, chit chaptee will tahe op this criticiasm hy itaelf and then include it in the analysis of political organizations. It it also necetsary to con- sidee the coerciveness celative to tome specifically toted criterion.t Therefoe, the discuttion places taxes in a specified political mechanism, 1. Esay i Ttaoatios, pp. tb. 2. DeViti DeMaco oa the othee haed has peented the history of tnaaion san eolationsi fosfvountay pymets, moigcfroota ycnti hations of toads and services to trihal chiefs to voluntory cotriteoions of money, oach as diect taxtcion hy a central goverowent. The esistecce of coo- stitutional peoisions ofalteepresentstiegermens thac notan hedeteesmined orecolected onless it is aprovced by the cepresentatives of the people is cited as evidencesthatsaxeo oreestillsvoluntaryinnte (Firast Pincipleof Pulic Finance, p. 1201. 3. Pacinhin nines a good discussion of voluntaey and inoluncary enployment, poining outthesocessity of hoingan oestohished criteionouponowhich to evslate the degree at volunariness that exists io a caesicalar situotion (Money, Intereac and Prices, pp. 210-ta). 5. TAXES AND THE POLITICAL PROCESS T hereeaetwohcroad caegories of pacical citiism invlving taxes and the political process. They ace practical citicisms he- canoe they do net question the logic of the theoey itself, hoc eather question its application to the real woeld. The first criticism is that taxes are complsory payments and cannot he consideeed analogous to prices in the macket. The second citicism is that the political organizationt of society acts in a unique way and cannot he contideced analogous to the macket mechanism. Both of these ceiticisms ace im- plicit in E. R. A. Seligman's history of taxation.t He presents the hittory of taxation as an evolutioary process, mating feces the volntary con- trihutiono to trihal chiefs to compulsory payments (each at direct taxationahy a cental government)?a Is cannot he denied that the history of tasation does indicate that there hace been elements of coercion inotaxation in the ceal world. This is as tone ahout the paysnents to trihal chiefs as ahout direct taxation hy a centeal gosernment. To approach the two criticisms logically, it is necessacy to sepacate them. Taxation onlyseists when a political oganization exists, hat the first criticism implies that taxes secm pusorcy pee ce, no mattr what feces of political organization exists. Thus, this chapter will tabs op this criticism hy itself and then include itcintheanalysis ofpoliticl organiations. It is also necessaryctocon sider the coerciveness celative to sme specifically stated criterion.t Therefore, the discussion places tones in a specified political mechanism, 1. Esay in Toacaios, pp. lb. 2. DeViti DeMarco on she other hand has presented she hisctory of taaiono asoaneolationcinfostfoutaroypaymens, moigframlnaycoti hations of goods and services to trihal chiets to voluntaey otriteions of money,schas direct taaionhy aceta oere nts. The eisece ofonc- stitutional provisions of of epresentative goverments that no tax he determned orclectoedounless itisa~poedhyhereyresetaties ofcthe peopleoiacited as evidence that cases are stilt solantary is noare (Picast Principles of Poblhc Finance, p. t20). 3. Patinhin gises a good discassion of voluntaey ted involuntary enployment, pointingcouttheecesity of hing ansabhished criteiouonowhichcto evolate the degree of oltoricess that exists in a particalae situaion (Mosey, fntereat and Price, pp. 211-14). 48 5. TAXES AND THE POLITICAL PROCESS T 'hereearetwohrad catgoies ofpracical criicisminvolving taxes and the political process. They ace practical criticisms he- cause they do not question the logic of the theory itself, hat rather question its applicationto the real world. The first criticism is that tones ace complsory payments and cannot he considered analogous to prices in the marhet. The second criticism is that the potstical organiation of society acts in a unique way andocannot hec ossdered analogous to the maohet mechanism. Both of chest criticismes ace im- plicit in E. R. A. Seligman's history of taxation.t He presents the history of taxation as an evolutionary process, moving feces the voluntary con- trihutions to tribal chiefs to compulsory payments (such as direct taxation by a central government)?0 Is cannot he denied that the histocy of taxation does indicate chat theehave heen eleenets of coercion in taxation in the real woeld. This is an tone ahout the payments to teihal chiefs an ahout direct taxation hy a conteal govecnment. To approach the two criticisms logically, itcisoecessaryto sepaate them. Taxation only exists when a political organisation exists, has the fiest criticises implies that taxes ace cam- pulsory pee se, no mactee what faces of political oeganization exsts. Thus, this chapter will cabe op this criticism hy itself and then include itcin the analyisof pliicalrganiation. It isalsocnecessary to con- aider the coerciveness relative to sme specifically stated criterion.t Therefore, the diwcumiin places taxes in a specified political mechanism, 1. Essays is Taxatios, pp. lb. 2. DeViti DeMaco on the other hand has peented the history of taxation at an evolution in forms at volutary paytesa, moving ftow volunart cotaco- hutions of goods and serviims to trihal chiefs to voluntsry otrihotions of mosey, such aa direct taxaticn by a coatsra governenst. The esistence of coo- stitutional peovisions of all represencttie govenents that noatax he detemined orecoleted unless it is approced hy the repesentativse of the people is cited aeidencecthattaes aee stilsoluntay innatue(FirstcPinciplesof Pubic Finance, p. 120). 3. Patinin gises a good discussion of voluntaey and involuntasy enployment, poiinfg outthesecessity ofhaing anoestshlished criterioouponcwhichcto evalate the degee of volunarinessathatexists in a paesicuasitaion (Mosey, fntereat and Prices, pp. 211-1a). 48  TAXES AND THE POLITICAL PROCESS and the conclusions are in terms of the degree of coercion relative to prices determined in a specified market situation. The second criticism is difficult to evaluate in the form in which it is often stated, because to give a complete evaluation, it would require data from real world situations. However, as it is stated here some evaluation is possible. The approach is to define political organizations in the terminology which is common to the analysis of market strue- tures. The conclusions about coercion are in terms of the degree of coercion in one political situation relative to alternative political situa- tions and relative to stated market situations. The very fact that the political organization can be defined in terms similar to those used for market structures suggests that the criticism is not entirely valid. The analysis would also suggest that in the real world taxes are likely to be coercive but that this is because the political organization is not any more likely to be the ideal than is the market structure. PRmCES AND TAXES Location of the point at which there is compulsion to act in a specified way in the case of both prices and taxes is one approach to considering the degree of coercion which exists for taxes relative to prices. It is assumed in the discussion that prices are impersonally determined in a purely competitive market situation, and that taxes are impersonally determined by a vote of all the individuals in the society. The market determines the individual's per-unit price of a good by the equality of the total demand for the good to the total supply of the good. The total demand for the good is the sum of the individual demands. The individual demands are expressed by the individuals' purchasing the good in the quantity desired at the price at which it is offered for sale. The market supply schedule of the good is the sum of the quantities which will be produced by individual firms at various marginal costs. Each firm must offer the good for sale at the per-unit price determined by the entire market for the good, because if a firm offered it at a higher price, the firm would have no sales, and if a 4. Coercion must be discussed in terms of the degree of coercion because compulsion exists in every form of organization. DeViti DeMarco, p. 50n, states: "Compulsion exists in every legal association of individuals; in business organiza- tions, in partnerships, in the church, and especially in labor unions." 5. Haavelmo's discussion of the need for a comparison between alternative economic models or frameworks under which a society may operate is the basis for the approach used here ("Notion of Involuntary Economic Decisions"). 49 TAXES AND THE POLITICAL PROCESS and the conclusions are in terms of the degree of coercion relative to prices determined in a specified market situation.4 The second criticism is difficult to evaluate in the form in which it is often stated, because to give a complete evaluation, it would require data from real world situations. However, as it is stated here some evaluation is possible. The approach is to define political organizations in the terminology which is common to the analysis of market strue- tures. The conclusions about coercion are in terms of the degree of coercion in one political situation relative to alternative political situa- tions and relative to stated market situations. The very fact that the political organization can be defined in terms similar to those used for market structures suggests that the criticism is not entirely valid. The analysis would also suggest that in the real world taxes are likely to be coercive but that this is because the political organization is not any more likely to be the ideal than is the market structure. PRICES AND TAXES Location of the point at which there is compulsion to act in a specified way in the case of both prices and taxes is one approach to considering the degree of coercion which exists for taxes relative to prices. It is assumed in the discussion that prices are impersonally determined in a purely competitive market situation, and that taxes are impersonally determined by a vote of all the individuals in the society. The market determines the individual's per-unit price of a good by the equality of the total demand for the good to the total supply of the good. The total demand for the good is the sum of the individual demands. The individual demands are expressed by the individuals' purchasing the good in the quantity desired at the price at which it is offered for sale. The market supply schedule of the good is the sum of the quantities which will be produced by individual firms at various marginal costs. Each firm must offer the good for sale at the per-unit price determined by the entire market for the good, because if a firm offered it at a higher price, the firm would have no sales, and if a 4. Coercion must be discussed in terms of the degree of coercion because compulsion exists in every form of organization. DeViti DeMarco, p. 50n, states: "Compulsion exists in every legal association of individuals; in business organiza- tions, in partnerships, in the church, and especially in labor unions." 5. Haavelmo's discussion of the need for a comparison between alternative economic models or frameworks under which a society may operate is the basis for the approach used here ("Notion of Involuntary Economic Decisions"). 49 TAXES AND THE POLITICAL PROCESS and the conclusions are in terms of the degree of coercion relative to prices determined in a specified market situation.4 The second criticism is difficult to evaluate in the form in which it is often stated, because to give a complete evaluation, it would require data from real world situations. However, as it is stated here some evaluation is possible. The approach is to define political organizations in the terminology which is common to the analysis of market struc- tures?. The conclusions about coercion are in terms of the degree of coercion in one political situation relative to alternative political situa- tions and relative to stated market situations. The very fact that the political organization can be defined in terms similar to those used for market structures suggests that the criticism is not entirely valid. The analysis would also suggest that in the real world taxes are likely to be coercive but that this is because the political organization is not any more likely to be the ideal than is the market structure. PnUCES AND TAXES Location of the point at which there is compulsion to act in a specified way in the case of both prices and taxes is one approach to considering the degree of coercion which exists for taxes relative to prices. It is assumed in the discussion that prices are impersonally determined in a purely competitive market situation, and that taxes are impersonally determined by a vote of all the individuals in the society. The market determines the individual's per-unit price of a good by the equality of the total demand for the good to the total supply of the good. The total demand for the good is the sum of the individual demands. The individual demands are expressed by the individuals' purchasing the good in the quantity desired at the price at which it is offered for sale. The market supply schedule of the good is the sum of the quantities which will be produced by individual firms at various marginal costs. Each firm must offer the good for sale at the per-unit price determined by the entire market for the good, because if a firm offered it at a higher price, the firm would have no sales, and if a 4. Coercion must be discussed in terms of the degree of coercion because compulsion exists in every form of organization. DeViti DeMarco, p. 50n, states; "Compulsion exists in every legal association of individuals; in business organiza- tions, in partnerships, in the church, and especially in labor unions." 5. Haavelmo's discussion of the need for a comparison between alternative economic models or frameworks under which a society may operate is the basis for the approach used here ("Notion of Involuntary Economic Decisions").  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE firm offered it at a lower price, the firm would in the long run not be able to cover the costs of production. The vote determines the individual's tax per unit of the good by the equality of the total demand for the good and the marginal cost of the government's production of the good. The total demand for the good is the sum of the individual demands. The individual demands are expressed by the individuals' voting on the quantity that they would desire at each of the various prices possible. The government is under a policy rule to deliver the quantity of the good to every individual in accordance with their expressed demand at the tax-price determined by the equality of the total demand and the marginal costs of production. In both of the above frameworks of analysis, the good can be assumed to be the same good in order to eliminate problems which are related only to the differences in types of goods generally supplied through the use of prices and those generally supplied through the use of taxes. Basic to the analysis is the issue of what constitutes a sale in the market. The legal and accounting concept of a sale is accepted in this analysis.t A sale takes place at the time at which some legally binding evidence of sale has changed hands between the buyer and seller. This means that the point (time) of sale is dependent upon policy rules of the government as to what is considered as legally binding evidence of a sale. It logically follows that a sale in the market is a compulsory act once it is considered to have taken place and that the price is a compulsory payment once the sale has taken place. The legally binding evidence of sale may be the exchange of money or goods for goods. It may also be the joint signing of a contract which legally binds the buyer to pay a certain sum (the sale price) at a specified time and the seller to physically deliver certain goods at a specified time.' Neither money nor goods have to physically change hands for a sale to take place. The sale price stated in the contract reflects the per-unit price to the individual as determined in the market. The point of sale in the case of a tax comes when the individuals of society cast their votes for the quantity of the good desired at the 6. The concept of the point of sale in accounting has been one of the never- ending problems of the accountant. See Paton and Paton, Corporation Accounts and Statements, Chap. 10. 7. The laws and customs of nations regarding when and what constitutes a sale vary as to the degree of compulsion exerted by the government to enforce contracts of sale, but most nations whose economic systems can be classified as a market system make the contract for sale a legally binding transaction. THE PRICE THEORY OF VALUE IN PUBLIC FINANCE firm offered it at a lower price, the firm would in the long run not be able to cover the costs of production. The vote determines the individual's tax per unit of the good by the equality of the total demand for the good and the marginal cost of the government's production of the good. The total demand for the good is the sum of the individual demands. The individual demands are expressed by the individuals' voting on the quantity that they would desire at each of the various prices possible. The government is under a policy rule to deliver the quantity of the good to every individual in accordance with their expressed demand at the tax-price determined by the equality of the total demand and the marginal costs of production. In both of the above frameworks of analysis, the good can be assumed to be the same good in order to eliminate problems which are related only to the differences in types of goods generally supplied through the use of prices and those generally supplied through the use of taxes. Basic to the analysis is the issue of what constitutes a sale in the market. The legal and accounting concept of a sale is accepted in this analysis.6 A sale takes place at the time at which some legally binding evidence of sale has changed hands between the buyer and seller. This means that the point (time) of sale is dependent upon policy rules of the government as to what is considered as legally binding evidence of a sale. It logically follows that a sale in the market is a compulsory act once it is considered to have taken place and that the price is a compulsory payment once the sale has taken place. The legally binding evidence of sale may be the exchange of money or goods for goods. It may also be the joint signing of a contract which legally binds the buyer to pay a certain sum (the sale price) at a specified time and the seller to physically deliver certain goods at a specified time.t Neither money nor goods have to physically change hands for a sale to take place. The sale price stated in the contract reflects the per-unit price to the individual as determined in the market The point of sale in the case of a tax comes when the individuals of society cast their votes for the quantity of the good desired at the 6. The concept of the point of sale in accounting has been one of the never- ending problems of the accountant. See Paton and Paton, Corporation Accounts and Statements, Chap. 10. 7. The laws and customs of nations regarding when and what constitutes a sale vary as to the degree of compulsion exerted by the government to enforce contracts of sale, but most nations whose economic systems can be classified as a market system make the contract for sale a legally binding transaction. 50 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE firm offered it at a lower price, the firm would in the long run not be able to cover the costs of production. The vote determines the individual's tax per unit of the good by the equality of the total demand for the good and the marginal cost of the government's production of the good. The total demand for the good is the sum of the individual demands. The individual demands are expressed by the individuals' voting on the quantity that they would desire at each of the various prices possible. The government is under a policy rule to deliver the quantity of the good to every individual in accordance with their expressed demand at the tax-price determined by the equality of the total demand and the marginal costs of production. In both of the above frameworks of analysis, the good can be assumed to be the same good in order to eliminate problems which are related only to the diferences in types of goods generally supplied through the use of prices and those generally supplied through the use of taxes. Basic to the analysis is the issue of what constitutes a sale in the market. The legal and accounting concept of a sale is accepted in this analysis.t A sale takes place at the time at which some legally binding evidence of sale has changed hands between the buyer and seller. This means that the point (time) of sale is dependent upon policy rules of the government as to what is considered as legally binding evidence of a sale. It logically follows that a sale in the market is a compulsory act once it is considered to have taken place and that the price is a compulsory payment once the sale has taken place. The legally binding evidence of sale may be the exchange of money or goods for goods. It may also be the joint signing of a contract which legally binds the buyer to pay a certain sum (the sale price) at a specified time and the seller to physically deliver certain goods at a specified time.t Neither money nor goods have to physically change hands for a sale to take place. The sale price stated in the contract reflects the per-unit price to the individual as determined in the market. The point of sale in the case of a tax comes when the individuals of society cast their votes for the quantity of the good desired at the 6. The concept of the point of sale in accounting has been one of the never- ending problems of the accountant. See Paton and Paton, Corporation Accounts and Statements, Chap. 10. 7. The laws and customs of nations regarding when and what constitutes a sale vary as to the degree of compulsion exerted by the government to enforce contracts of sale, but most nations whose economic systems can be classified as a market system make the contract for sale a legally binding transaction. 50  TAXES AND THE POLITICAL PROCESS various possible prices. The government is legally bound by a policy rule to establish the price in accordance with the vote of the individuals and the marginal cost of production. The individual is legally bound to accept the quantity of the good that he voted for at the tax-price set in accordance with the established policy rule. The casting of a vote is fully analogous to the signing of a contract. No money or goods change hands between buyer and seller or between taxpayer and gov- ernment at the point of sale, but once the point of sale is reached, the price or tax and the quantity to be supplied are determined. Once the sale is consummated, the price and tax are both compulsory under the given policy rules. Before the point of sale is reached, there is no market price, and likewise no tax-price. The conclusion that taxes are no more coercive than prices is de- pendent upon the type of political mechanism which is assumed to exist. The conclusion clearly may not be valid if the political mecha- nism does not provide a means by which individuals vote for both quantities and prices of each good. The conclusion also may not be valid if the government is not subject to a policy rule which makes taxes and quantity of the good supplied dependent upon the expressed desires of individuals. However, the conclusion makes it clear that there is nothing inherent in the collection of taxes which is more coercive than the collection of a price. Taxes and prices are merely a means of expressing the payment side of a transaction. If coercion exists in taxation, it is not because a tax was used as a means of pay- ment instead of a price. Coercion in taxation must result from some factor which affects the level of taxes to be collected for a good or the quantity of the good to be supplied at a particular level of taxes. THE MARKET MECHANISM AND THE POLITICAL MECHANISM The degree of coercion which exists in the political mechanism relative to that which exists in the market mechanism may be analyzed by defining different political situations (i.e., constitutional rules) in terms of accepted definitions of market situations.' The political situa- tions like the market situations are merely hypothetical. Specific real- world political situations come closer to being described by one of 8. For purposes of analysis, Machlup's terminology is adopted because it is based on the psychological aspects of the market which are more easily com- pared with the psychological aspects of the political situations and because it considers the market situations separately from the concept of the entry of new firms, pliopoly. See Economics of Sellers' Competition. 51 TAXES AND THE POLITICAL PROCESS various possible prices. The government is legally bound by a policy rule to establish the price in accordance with the vote of the individuals and the marginal cost of production. The individual is legally bound to accept the quantity of the good that he voted for at the tax-price set in accordance with the established policy rule. The casting of a vote is fully analogous to the signing of a contract. No money or goods change hands between buyer and seller or between taxpayer and gov- ernment at the point of sale, but once the point of sale is reached, the price or tax and the quantity to be supplied are determined. Once the sale is consummated, the price and tax are both compulsory under the given policy rules. Before the point of sale is reached, there is no market price, and likewise no tax-price. The conclusion that taxes are no more coercive than prices is de- pendent upon the type of political mechanism which is assumed to exist. The conclusion clearly may not be valid if the political mecha- nism does not provide a means by which individuals vote for both quantities and prices of each good. The conclusion also may not be valid if the government is not subject to a policy rule which makes taxes and quantity of the good supplied dependent upon the expressed desires of individuals. However, the conclusion makes it clear that there is nothing inherent in the collection of taxes which is more coercive than the collection of a price. Taxes and prices are merely a means of expressing the payment side of a transaction. If coercion exists in taxation, it is not because a tax was used as a means of pay- ment instead of a price. Coercion in taxation must result from some factor which affects the level of taxes to be collected for a good or the quantity of the good to be supplied at a particular level of taxes. THE MARKET MECHANISM AND THE POLITICAL MECHANISM The degree of coercion which exists in the political mechanism relative to that which exists in the market mechanism may be analyzed by defining different political situations (i.e., constitutional rules) in terms of accepted definitions of market situations.' The political situa- tions like the market situations are merely hypothetical. Specific real- world political situations come closer to being described by one of 8. For purposes of analysis, Machlup's terminology is adopted because it is based on the psychological aspects of the market which are more easily com- pared with the psychological aspects of the political situations and because it considers the market situations separately from the concept of the entry of new firms, pliopoly. See Economics of Sellers' Competition. 51 TAXES AND THE POLITICAL PROCESS various possible prices. The government is legally bound by a policy rule to establish the price in accordance with the vote of the individuals and the marginal cost of production. The individual is legally bound to accept the quantity of the good that he voted for at the tax-price set in accordance with the established policy rule. The casting of a vote is fully analogous to the signing of a contract. No money or goods change hands between buyer and seller or between taxpayer and gov- ernment at the point of sale, but once the point of sale is reached, the price or tax and the quantity to be supplied are determined. Once the sale is consummated, the price and tax are both compulsory under the given policy rules. Before the point of sale is reached, there is no market price, and likewise no tax-price. The conclusion that taxes are no more coercive than prices is de- pendent upon the type of political mechanism which is assumed to exist. The conclusion clearly may not be valid if the political mecha- nism does not provide a means by which individuals vote for both quantities and prices of each good. The conclusion also may not be valid if the government is not subject to a policy rule which makes taxes and quantity of the good supplied dependent upon the expressed desires of individuals. However, the conclusion makes it clear that there is nothing inherent in the collection of taxes which is more coercive than the collection of a price. Taxes and prices are merely a means of expressing the payment side of a transaction. If coercion exists in taxation, it is not because a tax was used as a means of pay- ment instead of a price. Coercion in taxation must result from some factor which affects the level of taxes to be collected for a good or the quantity of the good to be supplied at a particular level of taxes. THE MARKET MECHANISM AND THE POLITICAL MECHANISM The degree of coercion which exists in the political mechanism relative to that which exists in the market mechanism may be analyzed by defining different political situations (i.e., constitutional rules) in terms of accepted definitions of market situations.t The political situa- tions like the market situations are merely hypothetical. Specific real- world political situations come closer to being described by one of 8. For purposes of analysis, Machlup's terminology is adopted because it is based on the psychological aspects of the market which are more easily com- pared with the psychological aspects of the political situations and because it considers the market situations separately from the concept of the entry of new firms, pliopoly. See Economics of Sellers' Competition.  she hyposheticol sitations thanI by otsy of she o~thers. However, tso tpsoic reol-world politlsitaion~o is comtpletely desosibed by any of the bypotbstioal situaotions. Therefore, she cOoclusons only refer 10 hypothetical situations. Homever, she concluionsR are likely so opply foe the real-world situation as long as it caR be said thatoa porticulor rtol-world politirol situatioR is deocribed most0 closely by RonP portiosulos hypotbetiool sitoatios. Market polypoly is "0 11010 of m~ind of tellees who kow thot they hove comopetitions, bRt, its maskinog op their moinds aoust chansginlg their selling or prodssrtive policis do 1101 ponder 00er whot their oom- petitors' reactiots moight be."' Politiool polypoly is a otote of moind of votees soho bo thos they hoop competitos iR she formo of other 001000 with differesst dsireo foe the 10am1 pohlio good, hot its soohing up their msintds obost v'otinf foe portirsdor selling or prodoctive policieo do 1101 ponsder over sohot theie voter-comopetitors' reartioss msight be. Ito smosket polypoly is is usouslly ronoidered shot matoty hoyss oand manys sellees of o homoogrneouo prodoot exist. 1In politicol polypoly this ronoditiots is tsot of imtportanoce. The bsuyers otsd sellers ore the tome individusa its overy diresense551, and the exstencoe of manoty is ossored. All of she individuals which constitute a governmoesotol otsit of society arephoth the boyes otsd she sellers. A homtogenseoos prodoct is olso 1101 011 issuesisnce oll v01001 0010 osn she prodootion of eooh good separately. Eveon whpeethe ecoomic good is considred to be oil goversomesntol servires, the hosmogetsosus-prodt cosditiosn is sset hy the politico1 ssechosmt. The tsecessy conditions is foe she gornmensstt to act its accordance with the vole of she insdividuaols its regard to the quantity ansd price of tbs good to he supplied ansd in accordncesith knownspolicyyrlesoffovernmet. The goverssmet is thsus rosnsideed to be ntohitsg moos than a11 orgotsiootios foe the productiono of ths goods and services desired by the iodividoals of society. Is wosuld be nercessory foe the voting to he fos varioos quatities of the good at various pomsible prices its order to meet she conditios of the voluntary exchangeltheoy. Avoeron onequatity ofthe goodot oeprice is nsot suffiin foe a governsmetal organsizations which is to be tseutral its its owsn prodsuctivs octivities. The goverent most knsow the various rombitsatioss of quatlities osd poirs thot itsdividools ds- sire so thot they 0011 be compored with lbs cost of producing the various 9. Moohlop, p. l36. the hypotheticol sitootioss shots by oasy of the others. However, 110 specihic real-world politirol situatioR it completoly dscribed by aoy of the hypothetiool situation1s. Therefose, lbs conRclusios otsly refer to hypotheticol sitootioss. Howevep, the coRclusions ore likely to apply for thseel-worldsitootiontssloog as itrcaR besaid thatsopaticlar reol-world politiool sitooios is desoribed mot closely by onse portioolor hypothotiool siuation. Moret polypoly is "o sltst of mitsd of seilles who btsow that they hove competitioR, hot, itn moking op their minds oboos ohotsgitsg their sellitsg or prodoosive policims do ntso ponder over mhot their oom- petitors' reaortioos might be."' Politiool polypoly is o slote of mitsd of votsers swho btsow shot they hove competitors intshe form of othesovotes wish diffeet desires foe lbs some poblic good, hot ina makitsg op theis minds oboot voting for porticolor sellitsg or prodootive policies do ntso potsder oser mhot their voter-competitors' reartions might be. Its morket polypoly it is usually cotssidered shot many boyers otsd mansy mellers of a homogrtseoos prodocs soist. IR political polypoly this conditiots is tsot of impostotsce. The boyert anod tsellers ass the some insdividuals int a very direct sense, ansd lbs exitencer of mansy is astsed. All of the inodividools mhirh roostitots o govertsmetal ounit of society are both the boyrs ansd tbs sellrs. A homogenos prodoct islsotsootsanissoesisce allvotesrs votesonsthe poductionsof sorb good separately. Evensmhseelhemeonomic good is cotssidered to be oil govertsmettl evirm, the homogeneous-prodoct cotsditios is met by tbs politicol mechansm. The necressary conditions is foe the govsersmet to act its occordances with lbs vots of she intdividuals its regard to the quanstity ansd price of the good to be supplied ansd its acordance withbknown policyrlsof govermet. The goertsmt is thos rotssidsered to be ntsohitsg moos shots ats organizationo for the productsion of the goods and services desired by lbs individuals of society. Is moold be Recessary for she votitsg to bs foe various qootities of the good at vorioos possible prices its ordser to meset lbs consditionss of the volunary exchoange theory. A voton 01one quantity of the good at oeprice is tsot soficient foe a governmetstal organizationo which is to be neuoteal iR itsomts prodortivr activities. The governometst most bom the various combitioss of qootities osd prices that itsdividoals do- sirs so thot they oats be compored with she cost of producing she various 9. Mooblup, r. 136. 52 the hypothetiral sitoatioss thats by ansy of the othrs. However, n oprcifio real-world politirol situotiono it completely dewcribed by atsy of the hypothetical sitoatioss. Therefore, tbs conlosios otsly refer to hypothcticl situations. However, the cOolusions ass likely to apply for the reol-world sitoation as long as it rots be said that a particolor reol-world politicol sitootioo is described most closely by otse particolor hypothetical sitoation. Market polypoly it "a stole of mitsd of sellers who btsow thot they hove competitioR, hot, to moking op their mis aboot changinsg their sellisg or prodoctive polirieo do tsot ponder over what their com- petitoes' eaortions might be."t Political polypoly is a stole of mitsd of votrs who btsow shot they havr rompesitors ino she form of otherevoters with differenot desires foe the tome poblic good, hot its makitsg op their mitsds oboot voting foe particolar sellitsg or peodoctive policies do tsot potsder over whot their voter-competitos' reactions might be. Its morkes polypoly it is osoally cotssidered shot motsy boyers atsd mansy sellers of a homogreneoos prodoct roist. Its political polypoly this cotsditiots is tsot of importanre. The boyrs otsd sellers are she same insdividuals booa very direc tsensse, and lbs exittenace of many is atssoured. All of she itsdividoolt which otsitote o goverometl unsit of society are both the boyeso ansd she sellers. A homogeneoos prodoct is also soot on isooesinre all voters votr 0on lbs productioR of sorb good meparatly. Evens whsrestheeonomic good is contsidered to be oil governsmettl seovices, the homogetsooowprodoot conoditios is met by the politicol mechatsism. The Reressary cotsditios is foe the goversmet to act its aordances with the vote of tbs insdividuals its egard to the quantity ansd price of the good to be sopplied ansd its acordoanrewithbknownopolicy rlsof govrmnt.L Thegovetsmet is thos rotssidered to be ntsohitsg more thas OR orgotsiootios foe the production of she goods atsd sevices desired by the iodividoals of society. Is woold be nsosaroy foe the votitsg to he foe vorioos qootstities of she good at vorious possible prices in orer to meet the conditioos of the volontary exchansge theory. A vote on one qouantity of she good at oeprice is tsot soffiienot foe a govertsmetal orgotsizotios mhich is to be nseutral its its owno prodortive activities. The govsernmet most bnow she varioas rombitions of qouantities osd prires that itsdividools de- sire so that they vas be compared with the cost of producing lbs various 9. Morhlop, p. 136. 52  TAXES AND THE POLITICAL PROCESS quantities of the good. The essence of such a political situation is that the voter reveals his true preferences without concern for the prefer- ences which others are revealing. The voter knows that the governmental organization is restricted by constitutional rules that require the pro- duction policy of the government to be based on the total revealed preferences and costs of production. He also knows the constitutional rules require the taxation policy of the government to be based on the individual preferences for the quantity of the good to be supplied to the individual. The situations in the market and political mechanism are basically the same as those used in the analysis of taxes and prices. The con- clusion, as would be expected, is the same. Only now it can be said that in the market situation and political situation as defined there is no difference in the degree of coercion which would exist. Market oligopoly is a state of mind of sellers who know that they have competitors, and in making up their minds about changing their selling or production policies do take into consideration what their competitors' reactions might be.Yo Political oligopoly is a state of mind of governmental officials who know that they have competitors (other governmental officials), and in making up their minds about changing their selling or production policies do take into consideration what the competitors' reactions might be. The usual cause of market oligopoly is fewness of sellers, which gives the individual seller an awareness of the fact that his actions affect the total market situation and that others notice his actions and react to them. Political oligopoly is similar in that its cause is fewness of voters directly affecting the total market situation. Based on the considerations made in Chapter 3, it is assumed that true preferences would be revealed by individuals if they had the opportunity to vote. Therefore, the difference between political polypoly and political oligopoly is not considered to lie in the desire of the individual to reveal his true preferences. The difference is that in political polypoly the government as an organization is neutral in the determination of quantity of goods to be produced, whereas in political oligopoly the government as an organization is not neutral. The situation is one where the government's selling and production policies are directly determined by a vote of representatives of individuals in the society rather than by a vote of all individuals in the society. Each representa- 10. Machlup, pp. 349.53. 53 TAXES AND THE POLITICAL PROCESS quantities of the good. The essence of such a political situation is that the voter reveals his true preferences without concern for the prefer- ences which others are revealing. The voter knows that the governmental organization is restricted by constitutional rules that require the pro- duction policy of the government to be based on the total revealed preferences and costs of production. He also knows the constitutional rules require the taxation policy of the government to be based on the individual preferences for the quantity of the good to be supplied to the individual. The situations in the market and political mechanism are basically the same as those used in the analysis of taxes and prices. The con- clusion, as would be expected, is the same. Only now it can be said that in the market situation and political situation as defined there is no difference in the degree of coercion which would exist. Market oligopoly is a state of mind of sellers who know that they have competitors, and in making up their minds about changing their selling or production policies do take into consideration what their competitors' reactions might be.0 Political oligopoly is a state of mind of governmental officials who know that they have competitors (other governmental officials), and in making up their minds about changing their selling or production policies do take into consideration what the competitors' reactions might be. The usual cause of market oligopoly is fewness of sellers, which gives the individual seller an awareness of the fact that his actions affect the total market situation and that others notice his actions and react to them. Political oligopoly is similar in that its cause is fewness of voters directly affecting the total market situation. Based on the considerations made in Chapter 3, it is assumed that true preferences would be revealed by individuals if they had the opportunity to vote. Therefore, the difference between political polypoly and political oligopoly is not considered to lie in the desire of the individual to reveal his true preferences. The difference is that in political polypoly the government as an organization is neutral in the determination of quantity of goods to be produced, whereas in political oligopoly the government as an organization is not neutral. The situation is one where the government's selling and production policies are directly determined by a vote of representatives of individuals in the society rather than by a vote of all individuals in the society. Each representa- 10. Machlup, pp. 349-53. 53 TAXES AND THE POLITICAL PROCESS quantities of the good. The essence of such a political situation is that the voter reveals his true preferences without concern for the prefer- ences which others are revealing. The voter knows that the governmental organization is restricted by constitutional rules that require the pro- duction policy of the government to be based on the total revealed preferences and costs of production. He also knows the constitutional rules require the taxation policy of the government to be based on the individual preferences for the quantity of the good to be supplied to the individual. The situations in the market and political mechanism are basically the same as those used in the analysis of taxes and prices. The con- clusion, as would be expected, is the same. Only now it can be said that in the market situation and political situation as defined there is no difference in the degree of coercion which would exist. Market oligopoly is a state of mind of sellers who know that they have competitors, and in making up their minds about changing their selling or production policies do take into consideration what their competitors' reactions might be.t0 Political oligopoly is a state of mind of governmental officials who know that they have competitors (other governmental officials), and in making up their minds about changing their selling or production policies do take into consideration what the competitors' reactions might be. The usual cause of market oligopoly is fewness of sellers, which gives the individual seller an awareness of the fact that his actions affect the total market situation and that others notice his actions and react to them. Political oligopoly is similar in that its cause is fewness of voters directly affecting the total market situation. Based on the considerations made in Chapter 3, it is assumed that true preferences would be revealed by individuals if they had the opportunity to vote. Therefore, the difference between political polypoly and political oligopoly is not considered to lie in the desire of the individual to reveal his true preferences. The difference is that in political polypoly the government as an organization is neutral in the determination of quantity of goods to be produced, whereas in political oligopoly the government as an organization is not neutral. The situation is one where the government's selling and production policies are directly determined by a vote of representatives of individuals in the society rather than by a vote of all individuals in the society. Each representa- 10. Machlup, pp. 349-53.  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE tive is aware of the fact that his actions affect the total market situation and that his competitors notice his actions and react to them. His competitors are the representatives of other individuals in the society. Each representative will temper his actions because of the reactions which might be forthcoming from his competitors. The consequences of the constitutional rules are that the representative is aware of his position in the determination of what and how much at what price is to be produced by the government, and each representative takes into consideration the reactions of other representatives when deciding the preferences he will reveal. It is still possible, but not necessary, to assume that each representa- tive is attempting to obtain for those whom he represents the quantity and price relationship for each public good which they would desire. If the representative is not attempting to obtain the quantity and price relationship desired by the individuals he represents, it can be con- sidered that coercion is greater than in political polypoly. The higher degree of coercion is a result of a situation where the constitutional rules for the political organization do not permit the type of voting necessary for the government to be neutral in the determination of selling and production policy. Market monopoly is a state of mind "of a seller who knows neither any individuals nor any particular groups of sellers with whom he is in competition."11 Political monopoly is a state of mind of a government official who knows neither any governmental oficials nor any particular groups of society (political party) with whom he is in competition. In market monopoly the individual seller is unaware of a need for considering the reactions of any other sellers in the market. Therefore, his selling and production policies can vary greatly depending upon the motivation which is assumed to be the basis of his actions. He does not believe that the market process will require him to choose any particular policy. The pessimistic monopolist will attempt to make the most of the situation for himself in the short run. The optimistic monopolist may attempt to maintain his position by operating to make the most of the situation in the long run, or he may attempt to main- tain his position by advertising and research.2 Political monopoly is very similar to market monopoly. The single government official determines the selling and production policies for 11. Machlup, p. 544. 12. Machlup, pp. 555-57. THE PRICE THEORY OF VALUE IN PUBLIC FINANCE tive is aware of the fact that his actions affect the total market situation and that his competitors notice his actions and react to them. His competitors are the representatives of other individuals in the society. Each representative will temper his actions because of the reactions which might be forthcoming from his competitors. The consequences of the constitutional rules are that the representative is aware of his position in the determination of what and how much at what price is to be produced by the government, and each representative takes into consideration the reactions of other representatives when deciding the preferences he will reveal. It is still possible, but not necessary, to assume that each representa- tive is attempting to obtain for those whom he represents the quantity and price relationship for each public good which they would desire. If the representative is not attempting to obtain the quantity and price relationship desired by the individuals he represents, it can be con- sidered that coercion is greater than in political polypoly. The higher degree of coercion is a result of a situation where the constitutional rules for the political organization do not permit the type of voting necessary for the government to be neutral in the determination of selling and production policy. Market monopoly is a state of mind "of a seller who knows neither any individuals nor any particular groups of sellers with whom he is in competition."1 Political monopoly is a state of mind of a government oflicial who knows neither any governmental offcials nor any particular groups of society (political party) with whom he is in competition. In market monopoly the individual seller is unaware of a need for considering the reactions of any other sellers in the market. Therefore, his selling and production policies can vary greatly depending upon the motivation which is assumed to be the basis of his actions. He does not believe that the market process will require him to choose any particular policy. The pessimistic monopolist will attempt to make the most of the situation for himself in the short run. The optimistic monopolist may attempt to maintain his position by operating to make the most of the situation in the long run, or he may attempt to main- tain his position by advertising and research." Political monopoly is very similar to market monopoly. The single government official determines the selling and production policies for 11. Machlup, p. 544. 12. Machlup, pp. 555-57. 54 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE tive is aware of the fact that his actions affect the total market situation and that his competitors notice his actions and react to them. His competitors are the representatives of other individuals in the society. Each representative will temper his actions because of the reactions which might be forthcoming from his competitors. The consequences of the constitutional rules are that the representative is aware of his position in the determination of what and how much at what price is to be produced by the government, and each representative takes into consideration the reactions of other representatives when deciding the preferences he will reveal. It is still possible, but not necessary, to assume that each representa- tive is attempting to obtain for those whom he represents the quantity and price relationship for each public good which they would desire. If the representative is not attempting to obtain the quantity and price relationship desired by the individuals he represents, it can be con- sidered that coercion is greater than in political polypoly. The higher degree of coercion is a result of a situation where the constitutional rules for the political organization do not permit the type of voting necessary for the government to be neutral in the determination of selling and production policy. Market monopoly is a state of mind "of a seller who knows neither any individuals nor any particular groups of sellers with whom he is in competition."1" Political monopoly is a state of mind of a government official who knows neither any governmental officials nor any particular groups of society (political party) with whom he is in competition. In market monopoly the individual seller is unaware of a need for considering the reactions of any other sellers in the market. Therefore, his selling and production policies can vary greatly depending upon the motivation which is assumed to be the basis of his actions. He does not believe that the market process will require him to choose any particular policy. The pessimistic monopolist will attempt to make the most of the situation for himself in the short run. The optimistic monopolist may attempt to maintain his position by operating to make the most of the situation in the long run, or he may attempt to main- tain his position by advertising and research." Political monopoly is very similar to market monopoly. The single government official determines the selling and production policies for 11. Machlup, p. 544. 12. Machlup, pp. 555-57. 54  TAXES AND THE POLITICAL PROCESS all public goods without having to compete (vote) with any other governmental officials or political parties. He does not feel a need for considering the reactions of any other representatives of individuals of society because he believes he is the sole representative of the people. However, he may be pessimistic about his position because other repre- sentatives of the people may gain popular or military support. There- fore, he will attempt to make the most of the situation for himself in the short run. The political monopolist may also be optimistic about his position because he feels that he can act to prevent any other representative of the people from interfering with his position. As a result, he may operate to make the most of his situation in the long run by relying upon his influence over all possible competitors (all other political officials or all other political parties), or he may at- tempt to maintain his position by propaganda and by public demon- strations of being the "true" representative of the people. In political monopoly the taxpayer is reduced to a buyer and serves little, if any, role in the determination of what is to be produced. The potential buyer of a good in the market may be faced, because of the existence of a monopoly seller, with a higher price and therefore must modify the quantity which he purchases. The taxpayer-buyer of a public good has no such opportunity in the case of political monopoly. Public goods which have the characteristics of jointness of supply would have both price and quantity determined independent of the desires of the individual. Even without the characteristic of jointness of supply, in the case of political monopoly, the price and quantity might both be determined arbitrarily. The only opportunities for the individual to obtain his desires in regard to public goods are to escape from the political control of the governmental unit under which he lives or to find some governmental official or group which can take over as the accepted representative of the people. Coercion in political monopoly is considerably greater than under market monopoly. Market monopoly may cause higher prices than under alternative market situations, but the individual can still adjust the quantity of the good he purchases in accordance with the higher price. Therefore, economic freedom, in one sense at least, is not restricted by the existence of market monopoly. This, however, is not true for political monopoly, where both quantity and price are arbitrarily set by the government. Economic freedom is restricted and coercion does exist. However, the individual can still maximize his satisfaction for all goods, if he considers all governmental services as a single good. In 55 TAXES AND THE POLITICAL PROCESS all public goods without having to compete (vote) with any other governmental officials or political parties. He does not feel a need for considering the reactions of any other representatives of individuals of society because he believes he is the sole representative of the people. However, he may be pessimistic about his position because other repre- sentatives of the people may gain popular or military support. There- fore, he will attempt to make the most of the situation for himself in the short run. The political monopolist may also be optimistic about his position because he feels that he can act to prevent any other representative of the people from interfering with his position. As a result, he may operate to make the most of his situation in the long run by relying upon his influence over all possible competitors (all other political officials or all other political parties), or he may at- tempt to maintain his position by propaganda and by public demon- strations of being the "true" representative of the people. In political monopoly the taxpayer is reduced to a buyer and serves little, if any, role in the determination of what is to be produced. The potential buyer of a good in the market may be faced, because of the existence of a monopoly seller, with a higher price and therefore must modify the quantity which he purchases. The taxpayer-buyer of a public good has no such opportunity in the case of political monopoly. Public goods which have the characteristics of jointness of supply would have both price and quantity determined independent of the desires of the individual. Even without the characteristic of jointess of supply, in the case of political monopoly, the price and quantity might both be determined arbitrarily. The only opportunities for the individual to obtain his desires in regard to public goods are to escape from the political control of the governmental unit under which he lives or to find some governmental official or group which can take over as the accepted representative of the people. Coercion in political monopoly is considerably greater than under market monopoly. Market monopoly may cause higher prices than under alternative market situations, but the individual can still adjust the quantity of the good he purchases in accordance with the higher price. Therefore, economic freedom, in one sense at least, is not restricted by the existence of market monopoly. This, however, is not true for political monopoly, where both quantity and price are arbitrarily set by the government. Economic freedom is restricted and coercion does exist. However, the individual can still maximize his satisfaction for all goods, if he considers all governmental services as a single good. In 55 TAXES AND THE POLITICAL PROCESS all public goods without having to compete (vote) with any other governmental officials or political parties. He does not feel a need for considering the reactions of any other representatives of individuals of society because he believes he is the sole representative of the people. However, he may be pessimistic about his position because other repre- sentatives of the people may gain popular or military support. There- fore, he will attempt to make the most of the situation for himself in the short run. The political monopolist may also be optimistic about his position because he feels that he can act to prevent any other representative of the people from interfering with his position. As a result, he may operate to make the most of his situation in the long run by relying upon his influence over all possible competitors (all other political officials or all other political parties), or he may at- tempt to maintain his position by propaganda and by public demon- strations of being the "true" representative of the people. In political monopoly the taxpayer is reduced to a buyer and serves little, if any, role in the determination of what is to be produced. The potential buyer of a good in the market may be faced, because of the existence of a monopoly seller, with a higher price and therefore must modify the quantity which he purchases. The taxpayer-buyer of a public good has no such opportunity in the case of political monopoly. Public goods which have the characteristics of jointness of supply would have both price and quantity determined independent of the desires of the individual. Even without the characteristic of jointness of supply, in the case of political monopoly, the price and quantity might both be determined arbitrarily. The only opportunities for the individual to obtain his desires in regard to public goods are to escape from the political control of the governmental unit under which he lives or to find some governmental official or group which can take over as the accepted representative of the people. Coercion in political monopoly is considerably greater than under market monopoly. Market monopoly may cause higher prices than under alternative market situations, but the individual can still adjust the quantity of the good he purchases in accordance with the higher price. Therefore, economic freedom, in one sense at least, is not restricted by the existence of market monopoly. This, however, is not true for political monopoly, where both quantity and price are arbitrarily set by the government. Economic freedom is restricted and coercion does exist. However, the individual can still maximize his satisfaction for all goods, if he considers all governmental services as a single good. In  this rote, he muset alter hit consumtptioR of private goodo in accordane woith the toorginol otility pOP dollar's woorth of poblio goodt orbitrorily estoblished by the ootiooo of the politiool tooopolist. Coercono doet Rot depeod opoo tohether or cot the iodividutal 000 tmaxitoize hit ootiofootioo, beooote the iodioiduol coo alwayst aimz hit oatisfactioo by alteriog tohot he considero as an eoomic good. The degree of coeroioo does depend upoR the constiturtionol rolet thot bore been eotablished io the tooiety. A ohooge io the type of the tmorket tittuotion maoy not offect the degree of coorcon thot exitso. Therefore, the political mechotnittm it toore coercive io ootore oboe the moarket moechanittm ounless it it oasoumed thot the politiool mocha- nimcnbe clotsified 01 polbtiool polypoly. Pliopoly it the term applied by Moohlup to the concept of the eotey of Rn fierms io an iodottry, ood it it the exittence of pliopoly which teodt to elitoioote profile io the supply of goodo ino the morkot moechoanismo." Pliopoly, howevoer, doet toot bore to he oetricted to the actual enttry of n~ew firmso. It depends upon an objective evaluation of anoutsider oo to wohethee or ot it it peohable that Rn firmos toill color oany given indootry. A oimoilor cotocept coold be developed foe the politiool moehanismo 14 Politico1 pliopoly woold eefer to the probability thot the officiols io the govrent will act ino occordaoceteith the desireslof the inodividool io the society. The exioteooe of politicol pliopoly ouold, therefore, food to oliomioote coecion io the politicol meehotoismo. The ohjective foctoos Nhich ohoold be coosidered io evalootitng wehetheo or Rot gooernmeotol officials oro likely to so act ore complex, boo ot leost a fewo could be brefly poiorod oot. The tost obvouoo it whether or Rot theoe it 13. Moehlop, p. 211. 14. The political mtechaotiso hot no aouotatic foetoeo ohioh teod toelmnt eeofito. Whethee oe 001 the govertoment shoold makhe profito ooold he etobliohed intthe form of o constittioaltele, oe s soroelikel, ithelfomofoa policy eole ofloeret.Theohbeece rorenc of reofito intheooupplyof pobc goodo is of extremoe itopocrtance, sioce At determies ohetheothototol hodget of the govteernoent oilt ho o surplus hodget, holoooed hodget, or deficit hodget. Theefoee, fooe possihle polc eoles ore tisted oith the)r efefects 0000 rheot boouhdget, ostumino thtot thee oee conoisteotly oppliod to the peicieg of ovoec poblic good: (1) Aoooage Coot Peiciog Rolo-bolooced hodget; (2) Moegiool Coot Friciog Hle-hodget deteertioed bc the toloe of goods otpplied htviog increaoinor Cedceasinog costs; (3) Mooimoot Peodoctite of Foblic GoodtPricing Role (i.e., icreaig-ooot oods atoaoeoe cot and deceasoing- cot oods a1 moeointol cott)--deficit hodget; ood (A) Mitimuoo Feoduction of Fohlio Goodo Friciog Role (i.e., iocreointg-cost goods 01 maorginaol coot and deeosing-oost goods or average cost)-orploo budget. thit aoe, ho toust oler hit coonoumptiono of poivoto goodo ho occordane Nubh the mtargiRal utility por dollaor's worth of poblic goodt oobitrorily etaoblished by the octioos of the politicel monoopolist. Coeocioo doee oot depeod opont Nhether or cot the iodividool coot otaxitmize bit sotitfoctioo, becoote the indicidool coo alwcaysraimz hit sotisfoction by oltering wchot he coetideet 01 an ecoomotic good. The degree of coercion dooo depood opoo the coostitutioool eoles thor hove beeo eotohlished in the tociety. A chooge io the type of the mrooret situation may tnot affecot the degree of coerciono that exists. Therefore, the politicol mrechooitm it more coercive in notooe thoan the moarket mrechanismr unless it it assumed that rho political moecha- hos ca eclootified 01 politicol polypoly. Pliopoly it the loom opplied by Mochlop to the oncoept of the eotry of cow fiermt in oo inodootry, ocd it is the oxistence of pliopoly which toodt to elimiooto profits io the supply of goodt ie the maehet mechaeitm.tt Pliopoly, hoeer, doer cot hovo to he retricted to the octoal enotry of Row firmso. It depends uon aR objective evaluationt of an ootsider ot to Nbether or oot it it peoboble thor Rn fiems will eoter ocy givec iodutry. A sitoilor coocept coold be dovoloped foe the politicol roechooitto. Political pliopoly woold refer to the peobobility thot the offieiolt in the governomeot will ael io accordance with the desiret of the iodividool lo th rhoity. The exitteoce of politicol pliopoly woold, thorofore, teed to oliminaote coerciont io the politicol mechooism. The objeetive factors which shoold be coosidored inevoalooting whotheo or ol govternmental officiols aro likely to to act ore comoplex, boo ot leost a few could ho briofly poinred oRt. The tost obvioot it whethoo or cot thre it 13. Moohlop, p. 200. 14. Tho politicol otechoanisot boo no ooutototic foctoro ohich trod to eiminate profits. Whether or otot tho govermoent shoold otobo profits coold he eotoblishod it the form of o constitotionol role, or, as is more likely, io the boot ofa police oule of goovrwmtrt. The ohoetce 00 prescnce of poofisitheoorply of poblic goodo io of etreme importane, ofotce At determioeo wohether the tot hodget of the goverowont outl ho o oorrlos hodget, holonced hodget, or deficit bodget. Thereoore, foor poosihle polioy eoles ore led wtith oheirrefectooupon the lotal bodget, aooouming thot the0 ae consiotently oeelied to the pricing of 00000 poblbc good: (1) Averoge Coot Friciog HRule-holanced bodget; (21 Morgioal Coot Prioittg Hole-hedger deteewined by rho to)lor of goods sopplied having intcroosing tor deceaosiog costs; (3) Maotimtum Frodutiton of Poblic Goodo Pricing0 Robe (i.e., increasing-~cost ooodo 01 average coot aod decreooing- coot goods 01 otoeginaol wot)--deficit bodgot; otd (A) Mionitoo Peodoction of Foblie Goodo Peicing Hole (i.e.. inceain-cost goods 01 maorginol coot oand deceaoong-oot goods 01 oteroge eot)-orplos hodgot. 56 thit cooe, he wool alter hit consum~ption of poivote goods ho occordone with rho mroeginal utility per dollor's worth of poblic goods orbirrarily etaoblithed by the actions of rho politico1 moooliot. Coerciont doet Rot depeod opoo whether or cot the individual 000 maiiehit sotisfactieon, hecoose the inodiciduol coot olwoys maximize hit satisfactioR by olterinig whot he consides 00 an economic good. The degreo of coerciont doeo depend upontohe constitutional rules thor hove beeR estobliohed io the society. A change int the type of the mrko~et stuaetiono may toot affect the degree of coercion that exits. Thoeefore, rho political moechoaism is Nmore coercive in nature thant the morket mechonism ooless it it assomed that the politicl mtecha- nimcoot be clowsified 00 polbticol polypoly. Pliopoly it the term applied by Mochlap to the concept of the entry of ntew firmsr iR aR iotdotry, and it istrho existence of pliopoly whieh teotds to eliminate profits iR rho topply of goods iR rho maret Rtechaniom.tt Pliopoly, however, doet ot hovo to he oetrictod to the actual enrtry of noew firm. It depenods upont 00 objective evaluaionr of ao outsider at to Nhether 00 Rot it it preoble thor Root firmst will etler acy givoot industry. A timoilae coocopt coold ho develboped foo rho political otecbootiottt? Political pliopoly woold rofer to the prohobility thor the officiolo iot rho governetl will art iot accordaoteowith the detirestof the itodividool iot the tociety. Tho exiotootce of politicol pliopoly would, therefore, lond to elimiinate 00000100 inotrho political Rmechanism. The objective faRctors which shoold ho coidored in evaluotinog whetheo or cot governmtatl officiols are likely to so act oroccomplext, hot at leoot a few coold ho briefly pohoted out. The wool obvouoo it whother or trot there ho a 13. Machlop, p. 211. 14. Tho politiool meohoanism boo to ootomatic focoeo ohich teotd toelmnt poofito. Whetheor 00noo the govenment Rhould omake poofito oold ho established in tho foem of o constitutional role, or, as is mtoe liely, io rho forot of a rolice oule of goormte. The ohsencoe or resencoe of profito inthe soply of poblio goods is of etreowe imtportance, since At deteooineo whether the totol hodoet of the goteromeot will ho o sorploo bodget, holoned hodgot, or deficit hodgr. Therefore, boor rootihle polhcy roleo 000 lsed wth their effects 0000 rheota b)uhdget, assouming that thry aee onsoistetly opplird to the pricing0 of evecy poblio good: (1) Aere Coot Pricing0 Hole-bolonced hodget; (3) Marginaol Coot Ficing0 Role-hodget deteeminted bthe rhaoloe of goods soppolied havingiocresig oeceeosigcot; (3MaximumPodoctitoof Poli Goodo Fricingo Hole (i.e., increasing-cost goodo t 0000000 cost and deceooieg ost goods t orginal oot)--deficit hodget; ood (4) Minimoum Prodcono of Foblic Gloodo Pricing fobe (i.e., increaintg-cot goods ar maorginal coot oand deceaooingo-ooot 0oodoa ora000 cost) -orpluo hodget. 56  TAXES AND THE POLITICAL PROCESS regular process by which the individual can express his desires. Another would be whether or not desires are expressed for just a quantity at a given price, or a price at a given quantity, or for various quantities at various possible prices. Still another would be whether or not the governmental policy rules encourage the governmental officials to act in accordance with the desires of the individuals in the society. It can be considered, from these few factors affecting the existence or nonexistence of political pliopoly, that it would be most likely to occur under the constitutional rules (political situation) classified as political polypoly. The individual voter does have the opportunity to express his desires for the various quantities at the various prices through the voting process, and the policy rules of government require the governmental official to act in accordance with the vote-expressed desires of the individuals in society. However, political pliopoly is not necessary, because governmental officials once in office may be able to circumvent the policy rules or even the constitutional rules. There- fore, political pliopoly is not assured as a component part of political polypoly, but it is most likely to exist under the constitutional rules of that political situation. In the case of political oligopoly the three objective factors leading to political pliopoly, listed above, are not an inherent part of the political situation. However, this does not rule out the possibility of political pliopoly existing. Under political oligopoly the extent to which the representative can reveal desires different from the "true" desires of the individuals whom he represents depends upon the con- stitutional rules as to the voting for representatives and upon the con- stitutional rulestt as to the voting (balloting) process for specific goods and services. In other words, the likelihood of coercion (the absence of political pliopoly) depends upon whether or not the representative is aware of possible reactions on the part of the voters who choose the representative, and this may in turn depend, at least in part, on the knowledge that the voter is likely to have concerning whether or not 15. DeViti DeMarco states the necessary conditions as follows: "Only if the taxpayers participate in the initial calculation of wants, in which each person judges the economic advisability of paying a given tax in order to obtain in exchange a given public service, and only if this calculation is subjected to annual revision and is open to criticism and continuous public discussion by the Press, the political parties, the parliament, is it possible to have a guarantee that what is involved is a productive public expenditure-tbat is, one which is regarded as such by those who bear the cost" (First Principles in Public Finance, p. 118). 57 TAXES AND THE POLITICAL PROCEsSS regular process by which the individual can express his desires. Another would be whether or not desires are expressed for just a quantity at a given price, or a price at a given quantity, or for various quantities at various possible prices. Still another would be whether or not the governmental policy rules encourage the governmental officials to act in accordance with the desires of the individuals in the society. It can be considered, from these few factors affecting the existence or nonexistence of political pliopoly, that it would be most likely to occur under the constitutional rules (political situation) classified as political polypoly. The individual voter does have the opportunity to express his desires for the various quantities at the various prices through the voting process, and the policy rules of government require the governmental official to act in accordance with the vote-expressed desires of the individuals in society. However, political pliopoly is not necessary, because governmental officials once in office may be able to circumvent the policy rules or even the constitutional rules. There-. fore, political pliopoly is not assured as a component part of political polypoly, but it is most likely to exist under the constitutional rules of that political situation. In the case of political oligopoly the three objective factors leading to political pliopoly, listed above, are not an inherent part of the political situation. However, this does not rule out the possibility of political pliopoly existing. Under political oligopoly the extent to which the representative can reveal desires different from the "true" desires of the individuals whom he represents depends upon the con- stitutional rules as to the voting for representatives and upon the con- stitutional rulestt as to the voting (balloting) process for specific goods and services. In other words, the likelihood of coercion (the absence of political pliopoly) depends upon whether or not the representative is aware of possible reactions on the part of the voters who choose the representative, and this may in turn depend, at least in part, on the knowledge that the voter is likely to have concerning whether or not 15. DeViti DeMarco states the necessary conditions as follows: "Only if the taxpayers participate in the initial calculation of wants, in which each person judges the economic advisability of paying a given tax in order to obtain in exchange a given public service, and only if this calculation is subjected to annual revision and is open to criticism and continuous public discussion by the Press, the political parties, the parliament, is it possible to have a guarantee that what is involved is a productive public expenditure-that is, one which is regarded as such by those who bear the cost" (First Principles in Public Finance, p. 118). 57 TAXES AND THE POLITICAL PROCESS regular process by which the individual can express his desires. Another would be whether or not desires are expressed for just a quantity at a given price, or a price at a given quantity, or for various quantities at various possible prices. Still another would be whether or not the governmental policy rules encourage the governmental officials to act in accordance with the desires of the individuals in the society. It can be considered, from these few factors affecting the existence or nonexistence of political pliopoly, that it would be most likely to occur under the constitutional rules (political situation) classified as political polypoly. The individual voter does have the opportunity to express his desires for the various quantities at the various prices through the voting process, and the policy rules of government require the governmental official to act in accordance with the vote-expressed desires of the individuals in society. However, political pliopoly is not necessary, because governmental officials once in office may be able to circumvent the policy rules or even the constitutional rules. There- fore, political pliopoly is not assured as a component part of political polypoly, but it is most likely to exist under the constitutional rules of that political situation. In the case of political oligopoly the three objective factors leading to political pliopoly, listed above, are not an inherent part of the political situation. However, this does not rule out the possibility of political pliopoly existing. Under political oligopoly the extent to which the representative can reveal desires different from the "true" desires of the individuals whom he represents depends upon the con- stitutional rules as to the voting for representatives and upon the con- stitutional rulestt as to the voting (balloting) process for specific goods and services. In other words, the likelihood of coercion (the absence of political pliopoly) depends upon whether or not the representative is aware of possible reactions on the part of the voters who choose the representative, and this may in turn depend, at least in part, on the knowledge that the voter is likely to have concerning whether or not 15. DeViti DeMarco states the necessary conditions as follows: "Only if the taxpayers participate in the initial calculation of wants, in which each person judges the economic advisability of paying a given tax in order to obtain in exchange a given public service, and only if this calculation is subjected to annual revision and is open to criticism and continuous public discussion by the Press, the political parties, the parliament, is it possible to have a guarantee that what is involved is a productive public expenditure-that is, one which is regarded as such by those who bear the cost" (First Principles in Public Finance, p. 118).  the representative actually doeo Rttempt Is expesos the desires of thoe whom hr represent. If the repeenetatives hod to cR11 ballots for vros quantiieootroriousrprices for eachpuhlic goodhecase ofoacos- stitutional role, she roters could be owore of the fool thol thr rrpre- sentative is moodifying the individual roters' tror prrfereocer. If the representative Rmerely 0a010 a rote for or agains a specific quantity sod prsce of eorh pohfic good, as is usually the cole, the roter boo fees opportuRity to he awasre of the moodificotion of the individual rotero' line preferens. The loatrer constitutional role makCes it poooihle foe the representative to hoegoio iR the politicol process, hefore the decision 10 prodsce any pohic good comsoe to a ball ot, and to asure himself thot his role caR he cool withoot Icaosinog reoctios oo the part of those srho role the eepresentatire into office. Politicol pliopoly is leost likely to occr soder oh e coRstitiIonal roles of poflical monoopoly. The ooiy apprenRt reaon thot politicol pliopoly msight exsist seosuld he the oltruistic oiessoi of the govren~oetal officoi. The exiotence of policy roles of gorernement, which correspond to the objectire factors condered shore, woold constitute OR objectire foctor indicating the existence of political pliopoly even ins she core of pofitical monosopoly. The policy eules of the govrenset replace the contitutional erules as objectire foctors, hot policy rsules aee Rot con- trolled or limited by other constitutisol rssles iR the case of political monopoly sod therefore depend upons the public spirit of the govrn- mentol officoiso. Theconclusion obe dawn feom thenaslysis of the maeketemecha- isrm ard political mechonism 10 regard to coercion io thot the political echanilsm is lihely to be more coercire than the mssrket mechaosm, bst that the degree of coercion in the politico1 moechanisms is dependent spoo the constitutional roles thot establish the particular msechanisms. Also it caR he coRcuded thst cerlain constitutional roles sod/or policy rles of the govrnment coo be coosidered s objectire evidence that the degree eg coercion present iR aRy specific politicol situatioR is less than it otherwise would bore heeo. the representative actnally does attempt 10 exopess the desirer og those obomes epresentR. If the representtives hod to cost ballots for rorios qoaotities 01 various prices for ec public good becoose of a con- stitutional role, thb eroteers could he swore of she godt thos the repre- seototive ir esodifyiog the iodividool roters' troe pelereocer. If the represeotatire merely casts a rote for or againsla specific quaotity sod price of each public good, asoisoosully the coor, the roter has less opportonity to be swore of the modificoaiion of the individoal rotero' lre preferroceo. The lot ter constitutional role moker it poosible for the repeesestotire to bargoio io she politicol proceso, before the decisioo Is prodoce ony poblic good comes to a bollot, ood to osoore himself that his ooe oao be cast without causing reactions on the port of those who role the represesntatire into office. Polisicol pliopoly is roost likely 10 occur ooder the coootitotioool roles of political msoopoly. The only appareot reon that political pliopoly might eoist woold be the altruistic motires of the goreromeotal official. The eoisteoce of policy rules of goreromeot, which correspood to the objective fsctoro coooidered shore, woold conrtitote so objectire gactor iodicatiog the exiotence of political pliepoly even in the core of political mooopoly. The policy roles of tbe goreromeol replace the coootitotional roles as objectire factors, hot poliey ruleo ore not cson- trolled or limited by other conotitutional roles in the case og politicol msoopoly and therefore depeod opoo the poblic opirit of the govero- meotal officials. The coocloioo tobe drawo from the analysis of the market mechan- ism ood political mechaniom io regard to coercioo is that the politico1 msechaoism is likely to be more coercire than the market mechaoiom, hot that the degree of coercion io the political mechanism io dependeot spoo the coostitotiooal roles that establish the particolar mechaoism. Also it coo he conscloded that cerlaio coostitotional roles sod/or policy roles of the governmeot coo be coosidered as objectire evidence that the degree og coercioo peeet io soy opecific political sitoation is lees than it otherwise woold hare beeo. the representatire actoally does attempt to expeess the desires of those whom beepreseots. If the represeotatices hod to cool balloto for rarios qoootiiesoatrorioosoprices forecb pblic godecase of accon- otitotional role, lbe eroero coold he oware of she fool thot lbe repre- seotatice is modifyiog the iodividool roters' true prefereoceo. If the repesentatire merely costs a role foe or against a specific qoaotity sod price of each poblic good, or is usually the caoe, the wotr boo leos opportooity lo be swore of the msodificationo0f the iodiridoal roters' tre prefeemceo. The lollter cocstituioool role makes it possible for the represesstotire to bargoio in the politicol process, before the decisioc to prodoce aoy poblic good comes to a ballot, aod Is aooure himself that his role coo be cRst weithout causiog reactioos on the port of those who cole the represeotatire isnto office. Polisicol pliopoly is lest lihely to occor uoder she coootitotiooal roles of politico1 monopoly. The only apparent reson that political pliopoly might exsist woold he the altroistic intives of the goveromeotal official. The exstence of policy rules of goreroment, which correspcnd to the objectire facosr considered shore, woold coortitote on objectire factcr iodicatiog the eoisteoce of political pliopoly ereo iR the case of poitical msonopoly. The policy roles of tbe goreromeot replace the costitutional roles 00 Rbjective factors, hot pclicy roles ore ot con- trolled or limited by other conotitutional roles io the case of political monopoly aod therefore depend opon tbe poblic spirit of the govero- meotal officiaso. The conclusion to be drawn from the anoalysio of the marketmechao- ism and political mechaoism io regard to coercion is tbat the political mecbaoism is likely to be more coercive than the morket mecbaoism, but that the degree of coercioo in the political mechaoism is dependent opoo the coostitotiooal roles thot establisb the particolar mechaoism. Also it coo he concluded thot certain constitotional roles and/or policy rsles of the govrnment eon he considered as objectire evidence tbat tbe degree of coercion present in soy specific poflicol sitoation is less tban it otherwise woold bare been. 58 5 $8  6. APPLICATIONS OF THE SUGGESTED APPROACHES The approach adopted in ChapterS5 toanalyze the criticismsc of pricr theory of public finance represents a suggested approach to the general area of the effects of political organization on the supply of public goodo. This ohapteo acill carry the approach ore atep further to indicate howc it mcay be applied to the existiug area of intergovern- cmoutal relationc. The second part of thic chapter wcill carry the theo- retical fraumeaworb suggocted in Chapter 4 ore strp further to iudicate howc it mray br applied to the existiug area of national goals. INTERGOOENuENTAL RELTIONSc Intergoveeurmental relatiouc hoc beeu an area of study withiu the fields of political scieuce aud public fiuauce. To mauy curer the political rcietitrdocshisoresearch iuteruoof the adiisratie relationsand the ecoomistdoechiscresearch iutermsaofthe fiuoocial relation. The study of admciniatrative relations brief iodependeot of the study of financialerelaions, aud vi ce versa,umay lead to conflict betwceenothe couclosious derived. Inrerdisciplinary studies are soumetiumes aced as a etehod of elimuinatinf the couflict in couclusions, bat the reaultr havenot beenatoo encouragig.Te pobletoulargeextent liesoiu the differeoce of termoiuology iu the taco fields, and iu the fact that neithr the political ecieutiat or the ecocomcist coo vcisualize the too- portance of asmall distioctions brief uaade reich the apecial teruainolofy of our field oc analysis beiug euaployed by the specialiat of the other field. Thre issimuply a growiug creed foe specialists trained in muore than ace field. The ecounomist in the area of inteegoernoreutal rela- tioor mourt understand the termainology and concepts of the political scentist. Fortheerore, thecoomoistomusterecognize howothe cocepts of political science muay maodify the ecounomie analysic wehich is appro- priate it a gien aituutica, aud hare to expresa the coocepts of political scenceinatersawhich areconsistet withecoomcic trmandframa- woorksof analysiscused inpecificcitation. Defiuing political orgauiationa in trerm of ecooic omarbet struc- turestrepreaentsaposaiblerapproach to part ofthepoblema. The broad cateforiea of political stroctares used iu Chapter 5 ace not adequate. 59 6. APPLICATIONS OF THE SUGGESTED APPROACHES T he approach adopted iu Chapter 5 to analyae the criticisums of the opration of the political orfanization woith respect to the price theory of public flunace repeenta a suggested approach to the general area of the effects of political organization on the supply of public gooda. This chapter wll carry the approach ace ctrp further to indicate bore it mray be applied to the existing area of interfoerno- crental relatioos. The secood part of this chapter wil carry the thea- retical framreworsuggstd inChapter 4 cnerateplfurthercatoidicate hare it mray be applied to the existing area of national goals. INTERGOVERNMcEAL llREAION Interfovrnenrtal relations hoc heo an area of study within the fields of political sceuce and public finance. In omany curer the political scientit doehiresearch intrmsaof theadiitrativerelationsand therecoomoitdoeschisresearch intermstof the fiaial relation. The study of admrinistrative relations being iodependeot of the raudy of floancialelations, andriceoersa,cmay leado coflict bteeothe conclusions derived. Interdisciplinary studies are sometimers card or a creahod of elicrinating the ecntict it cooclusions, hot the results hare not hero too encouraging. The problecr to a large exteot lier in the differece of terminolofy in the taco fields, and in the fact that neither the political sciectist or the ecoomist coo cloualie the im.- portace of smrall distioctions being crude reith the special teerinolofy of cur field cc analysio beinf ecoployed by the specialist of the other field. Thereriscsimply afgowing needforespecialistsutrained incrore thou cue field. The economrist in the area of intrgovernmrental rela- tions mourt undrsand the teriology cod concepts of the political scentiot. Furthermore, the ecoomist court reognice bore the coocepts of political scence cray crodify the economric analysir which is appro- priate to a fiven situation, and bore to express the concepts of political science intermscrwhich areeconsistentreithcoomicatrmsrand framre- reorks of aoalysis card in specific situation. Defining political organiations io terms of econcomic mrarbet struc- turestreprreetsrapossiblerapproach to part of tepoblemr. The broad catefories of political structures card in Chapter S are ot adequate. 59 6. APPLICATIONS OF THE SUGGESTED APPROACHES T he approach adopted ic Chapter 5 to cnalyce the eriticiscoc of the opration of the political orfaniation reith esprect to the price theory of public finance repereets a sugfesced approach to the feneral area of the effects of political organization on the supply of public goods. This chapter reill carry the approach one ctrp farther to indicate bore it cray hr applied to the existing area of intrgocern- mrentalelaion. Threseond part of thischapterewillecarry the tho- retical fracreacorb cugfesced in Chapter 4 one step farther to iodicate bore it mray be applied to thre eiting area of cational goals. INTERGOVERNMENAL RotLAracer Intrgrfnmenrrtl elaions baas heo an area of raudy reithin the fields of political science and public finance. Io cranycaesa the political scientitrdoeshisresearch inrecrmsof thediisratie rlaionad the ecocrmitdocrhisrresearch intermscofhe finaocil rlation. The study of adcrinisratice relations beiof independent of the study of financial rlation, andcvicreversarcraylad toconlict bteenthe conclusions driv-ed. Interdisciplinary studies are somretimres card or a crethod of elicrinating the cooflict in coclusion, bat the results bovr cot baen too encouraging. The problemo tc a large extent fliea to the differerc of terminology in the taco fields, and in the fact that neithee the political scientist nor the econocrist coo cisualiae the imr- portance of scrall distictiocs being crude wiab the special terinology of ace field oc analysis beiof ecoployed by the specialirt of the other field. Thre is simply a growcing teed foe specialists trained to mrore than one field. The ecocncrist in the area of intergovercnmentl rela- tions court undertad the teeriology cod concepts of the political centist. Furthercoore, the conocrisc court recognice how the coocepto of political scece cray coodify the ecoomioc aoalysir which ic appro- priate to a fivet situation, and bore to express the concepts of political scienceeintermsrwhich arerconsistentwith ecoomcermsaod framer- works of aoalysis aced to speciflo situations. Defininf political organizations to tercos of econcomic crarbet carte- turesrerprresentsapossible approachto partfhe polem. The broad eatefories of political srurctreecard in Chapter 5 are cot adequate.  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE Market oligopoly is the general case in the real world, just as political oligopoly is the general case for all levels of government in the United States. Oligopoly theory, however, suggests that market oligopoly tends to be unstable and leads to forms of collusion. Therefore, market oli- gopoly is defined in terms of various forms of collusion. The envisioned area within intergovernmental relations may be termed comparative governmental institutions and would logically follow the same form of definitions as has been adopted in market oligopoly analysis. Each real-world situation would have to be defined in terms of the type of collusion existing in the political organization and the likelihood of pliopoly factors affecting the actions of the political organization. Examples of the application of this approach are beyond the in. tended purpose of this monograph. However, the next chapter will in general terms consider the probability of the future use of this and other frameworks derived from the price theory of public finance in empirical or applied areas of studies within the field of economics and political science. It is sufficient here to note the possible application. NATIONAL GOALS Contemporary public finance has emphasized the role of government in achieving the goals of the nation. In the United States these goals have been stated by Congress to be related to full employment, price stability, and economic growth. A fourth goal which is important to many nations is related to economic development. The Western nations have not stressed economic development, in part because they consider that they have already achieved a relatively high level of it. The existing terminology in the literature causes some dificulties because it is often difficult to ascertain the difference, if any, between economic growth and economic development. Changes in Gross Na- tional Product or per-capita Gross National Product from one period of time to the next period of time are often thought to measure changes in economic development and economic growth. However, there also exists literature which cites various factors that determine a nation's development and another set of factors that determine a nation's growth. The set of factors cited for each, development and growth, is not entirely consistent between authors, but generally the factors cited as determining economic development have to do with the allo- cation of given resources with a given level of technology in a period of time, while those determining economic growth have to do with changes in resources and technology over time. THE PRICE THEORY OF VALUE IN PUBLIC FINANCE Market oligopoly is the general case in the real world, just as political oligopoly is the general case for all levels of government in the United States. Oligopoly theory, however, suggests that market oligopoly tends to be unstable and leads to forms of collusion. Therefore, market oli- gopoly is defimed in terms of various forms of collusion. The envisioned area within intergovernmental relations may be termed comparative governmental institutions and would logically follow the same form of definitions as has been adopted in market oligopoly analysis. Each real-world situation would have to be defined in terms of the type of collusion existing in the political organization and the likelihood of pliopoly factors affecting the actions of the political organization. Examples of the application of this approach are beyond the in- tended purpose of this monograph. However, the next chapter will in general terms consider the probability of the future use of this and other frameworks derived from the price theory of public finance in empirical or applied areas of studies within the field of economics and political science. It is sufficient here to note the possible application. NATIONAL GOALS Contemporary public finance has emphasized the role of government in achieving the goals of the nation. In the United States these goals have been stated by Congress to be related to full employment, price stability, and economic growth. A fourth goal which is important to many nations is related to economic development. The Western nations have not stressed economic development, in part because they consider that they have already achieved a relatively high level of it. The existing terminology in the literature causes some dificulties because it is often difficult to ascertain the difference, if any, between economic growth and economic development. Changes in Gross Na- tional Product or per-capita Gross National Product from one period of time to the next period of time are often thought to measure changes in economic development and economic growth. However, there also exists literature which cites various factors that determine a nation's development and another set of factors that determine a nation's growth. The set of factors cited for each, development and growth, is not entirely consistent between authors, but generally the factors cited as determining economic development have to do with the allo- cation of given resources with a given level of technology in a period of time, while those determining economic growth have to do with changes in resources and technology over time. 60 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE Market oligopoly is the general case in the real world, just as political oligopoly is the general case for all levels of government in the United States. Oligopoly theory, however, suggests that market oligopoly tends to be unstable and leads to forms of collusion. Therefore, market oli- gopoly is defined in terms of various forms of collusion. The envisioned area within intergovernmental relations may be termed comparative governmental institutions and would logically follow the same form of definitions as has been adopted in market oligopoly analysis. Each real-world situation would have to be defined in terms of the type of collusion existing in the political organization and the likelihood of pliopoly factors affecting the actions of the political organization. Examples of the application of this approach are beyond the in- tended purpose of this monograph. However, the next chapter will in general terms consider the probability of the future use of this and other frameworks derived from the price theory of public finance in empirical or applied areas of studies within the field of economics and political science. It is sufficient here to note the possible application. NATIONAL GOALS Contemporary public finance has emphasized the role of government in achieving the goals of the nation. In the United States these goals have been stated by Congress to be related to full employment, price stability, and economic growth. A fourth goal which is important to many nations is related to economic development. The Western nations have not stressed economic development, in part because they consider that they have already achieved a relatively high level of it. The existing terminology in the literature causes some dificulties because it is often difficult to ascertain the difference, if any, between economic growth and economic development. Changes in Gross Na- tional Product or per-capita Gross National Product from one period of time to the next period of time are often thought to measure changes in economic development and economic growth. However, there also exists literature which cites various factors that determine a nation's development and another set of factors that determine a nation's growth. The set of factors cited for each, development and growth, is not entirely consistent between authors, but generally the factors cited as determining economic development have to do with the allo- cation of given resources with a given level of technology in a period of time, while those determining economic growth have to do with changes in resources and technology over time. 60  APPLICATIONS OF THE SUGGESTED APPROACHES If the above general differences between development and growth are accepted, the suggested approach to the price theory of public finance provides a means of more explicitly stating the differences. Economic development could be expressed in terms of the degree to which the nation has achieved its optimum allocation of resources dur- ing a given period of time. Figure 22 illustrates this concept of de. velopment. Point A represents the actual allocation between public and private goods, while point B represents the allocation which would result from an optimum allocation of resources. The level of economic development achieved would be expressed in terms of the percentage Private Goods PC's £ i 90% Development 80% Development A 0 Public Goods Figure 22. of full development. The factors determining the level of development achieved would be the structure of the market sector of the economy, the structure of the political sector of the economy, the extent of knowledge about both public and private goods, the measurability of public good demand, the mobility of resources, etc. Economic growth can be differentiated from economic development with the suggested approach because economic growth takes place over time. Two different concepts of growth are clearly possible with the suggested approach. One concept illustrated in Figure 23 would be that economic growth can be expressed in terms of the change in the optimum allocation of resources (i.e., the change from point B for time period 1 to point C for time period 2). In this context the factors determining economic growth would be changes in the quantity or quality of existing resources, changes in technology, changes in the tastes and preferences of the individuals of the nation, changes in 61 APPLICATIONS OF THE SUGGESTED APPROACHES If the above general differences between development and growth are accepted, the suggested approach to the price theory of public finance provides a means of more explicitly stating the differences. Economic development could be expressed in terms of the degree to which the nation has achieved its optimum allocation of resources dur- ing a given period of time. Figure 22 illustrates this concept of de. velopment. Point A represents the actual allocation between public and private goods, while point B represents the allocation which would result from an optimum allocation of resources. The level of economic development achieved would be expressed in terms of the percentage Private Goods PC's £i " 90% Development 80% Development A 0Public Goods Figure 22. of full development. The factors determining the level of development achieved would be the structure of the market sector of the economy, the structure of the political sector of the economy, the extent of knowledge about both public and private goods, the measurability of public good demand, the mobility of resources, etc. Economic growth can be differentiated from economic development with the suggested approach because economic growth takes place over time. Two different concepts of growth are clearly possible with the suggested approach. One concept illustrated in Figure 23 would be that economic growth can be expressed in terms of the change in the optimum allocation of resources (i.e., the change from point B for time period 1 to point C for time period 2). In this context the factors determining economic growth would be changes in the quantity or quality of existing resources, changes in technology, changes in the tastes and preferences of the individuals of the nation, changes in 61 APPLICATIONS OF THE SUGGESTED APPROACHES If the above general differences between development and growth are accepted, the suggested approach to the price theory of public finance provides a means of more explicitly stating the differences. Economic development could be expressed in terms of the degree to which the nation has achieved its optimum allocation of resources dur. ing a given period of time. Figure 22 illustrates this concept of de- velopment. Point A represents the actual allocation between public and private goods, while point B represents the allocation which would result from an optimum allocation of resources. The level of economic development achieved would be expressed in terms of the percentage Private Goods PCL's £ i' 90% Development 80% Development A 0 Public Goods Figure 22. of full development. The factors determining the level of development achieved would be the structure of the market sector of the economy, the structure of the political sector of the economy, the extent of knowledge about both public and private goods, the measurability of public good demand, the mobility of resources, etc. Economic growth can be differentiated from economic development with the suggested approach because economic growth takes place over time. Two different concepts of growth are clearly possible with the suggested approach. One concept illustrated in Figure 23 would be that economic growth can be expressed in terms of the change in the optimum allocation of resources (i.e., the change from point B for time period 1 to point C for time period 2). In this context the factors determining economic growth would be changes in the quantity or quality of existing resources, changes in technology, changes in the tastes and preferences of the individuals of the nation, changes in  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE the ownership of economic resources, etc. A second concept of economic growth illustrated in Figure 23 would be that economic growth can be expressed in terms of the change in the transformation curve. In this context the factors determining economic growth would be limited to changes in the quantity and quality of resources and changes in technology. The former concept of economic growth has the advantage of tying growth to the welfare economics concept of the optimum allocation of resources. The latter concept has the advantage of being closer to the literature on the factors determining economic growth. I Private Goods THE PRICE THEORY OF VALUE IN PUBLIC FINANCE the ownership of economic resources, etc. A second concept of economic growth illustrated in Figure 23 would be that economic growth can be expressed in terms of the change in the transformation curve. In this context the factors determining economic growth would be limited to changes in the quantity and quality of resources and changes in technology. The former concept of economic growth has the advantage of tying growth to the welfare economics concept of the optimum allocation of resources. The latter concept has the advantage of being closer to the literature on the factors determining economic growth. THE PRICE THEORY OF VALUE IN PUBLIC FINANCE the ownership of economic resources, etc. A second concept of economic growth illustrated in Figure 23 would be that economic growth can be expressed in terms of the change in the transformation curve. In this context the factors determining economic growth would be limited to changes in the quantity and quality of resources and changes in technology. The former concept of economic growth has the advantage of tying growth to the welfare economics concept of the optimum allocation of resources. The latter concept has the advantage of being closer to the literature on the factors determining economic growth. Figure 23. With either concept of economic growth it is apparent that growth may affect the nation's economic development in subsequent periods of time. This would be particularly true for the first concept, but to some extent true for the second. Economic development in a given period is also likely to affect growth over time. The analysis of these effects is beyond the scope of this monograph. However, it should be noted that Gross National Product, or even per-capita Gross National Product, is not an adequate measure of either economic development or economic growth as they are stated here. Development compares the actual output with a potential output, while growth compares the potential of one period to the potential of another period of time. A change in the actual output from one period to another period of 62 Figure 23. With either concept of economic growth it is apparent that growth may affect the nation's economic development in subsequent periods of time. This would be particularly true for the first concept, but to some extent true for the second. Economic development in a given period is also likely to affect growth over time. The analysis of these effects is beyond the scope of this monograph. However, it should be noted that Gross National Product, or even per-capita Gross National Product, is not an adequate measure of either economic development or economic growth as they are stated here. Development compares the actual output with a potential output, while growth compares the potential of one period to the potential of another period of time. A change in the actual output from one period to another period of 62 Figure 23. With either concept of economic growth it is apparent that growth may affect the nation's economic development in subsequent periods of time. This would be particularly true for the first concept, but to some extent true for the second. Economic development in a given period is also likely to affect growth over time. The analysis of these effects is beyond the scope of this monograph. However, it should be noted that Gross National Product, or even per-capita Gross National Product, is not an adequate measure of either economic development or economic growth as they are stated here. Development compares the actual output with a potential output, while growth compares the potential of one period to the potential of another period of time. A change in the actual output from one period to another period of 62  APPLICATIONS OF THE SUGGESTED APPROACHES time may be caused by changes in the determinants of development or by growth, with the determinants of development given. The suggested approach to the price theory of public finance also provides a means of linking the goal of full employment to economic development, economic growth, and the optimum allocation of re- sources. Full employment exists with any combination of private and public goods which lies on the transformation curve. Thus the goal of full employment is achieved when the actual output for a period is any one of the potential outputs expressed by the transformation curve. Full employment in both of two periods where economic growth has taken place would indicate that the growth has been accompanied r Private Goods APPLICATIONS OF THE SUGGESTED APPROACHES time may be caused by changes in the determinants of development or by growth, with the determinants of development given. The suggested approach to the price theory of public finance also provides a means of linking the goal of full employment to economic development, economic growth, and the optimum allocation of re- sources. Full employment exists with any combination of private and public goods which lies on the transformation curve. Thus the goal of full employment is achieved when the actual output for a period is any one of the potential outputs expressed by the transformation curve. Full employment in both of two periods where economic growth has taken place would indicate that the growth has been accompanied Private Goods E PCL's EI i's 0% A 70% 0 Public Goods Figure 24. by an increase in output. However, the achievement of full employ- ment may be in conflict with the achievement of economic develop. ment. The possible conflict is expressed by Figure 24. Point A represents the combination of private and public goods which would actually be produced if the government did not take fiscal policy measures designed to achieve full employment. Point B represents the combination of private and public goods associated with the optimum allocation of resources. Point C represents the actual output that would occur if the government takes certain actions in order to achieve full employment. In the particular case cited the combination given by point A with less than full employment repre- sents a higher level of development than the combination at point 63 APPLICATIONS OF THE SUGGESTED APPROACHES time may be caused by changes in the determinants of development or by growth, with the determinants of development given. The suggested approach to the price theory of public finance also provides a means of linking the goal of full employment to economic development, economic growth, and the optimum allocation of re- sources. Full employment exists with any combination of private and public goods which lies on the transformation curve. Thus the goal of full employment is achieved when the actual output for a period is any one of the potential outputs expressed by the transformation curve. Full employment in both of two periods where economic growth has taken place would indicate that the growth has been accompanied Private Goods I PCL's EI i's 0% A 70% 0 Public Goods Figure 24. by an increase in output. However, the achievement of full employ- ment may be in conflict with the achievement of economic develop. ment. The possible conflict is expressed by Figure 24. Point A represents the combination of private and public goods which would actually be produced if the government did not take fiscal policy measures designed to achieve full employment. Point B represents the combination of private and public goods associated with the optimum allocation of resources. Point C represents the actual output that would occur if the government takes certain actions in order to achieve full employment. In the particular case cited the combination given by point A with less than full employment repre- sents a higher level of development than the combination at point 63 Figure 24. by an increase in output. However, the achievement of full employ- ment may be in conflict with the achievement of economic develop- ment. The possible conflict is expressed by Figure 24. Point A represents the combination of private and public goods which would actually be produced if the government did not take fiscal policy measures designed to achieve full employment. Point B represents the combination of private and public goods associated with the optimum allocation of resources. Point C represents the actual output that would occur if the government takes certain actions in order to achieve full employment. In the particular case cited the combination given by point A with less than full employment repre- sents a higher level of development than the combination at point 63  C with foil emoploywent. Int this cose foil emsploymoent woofld he ochiev- ed by producing more of poblic goods thast the society desired and thereforo is ist conflict withs the gool of ecoomic deelopwenst. The relative effects of combhinations A osnd C oR econoomic geotth, hoss- evec, way he a differenot statter. Cosohiootioo C oith foil emsployment Rosy resolt in more or Iess economic growtb than cosohinsotioo A. Agoio this ts a question whioh is beyood the bouoods of this wono- geoph. The potential of foether worh withiR this frsoseworh oppoes tR o be vey greot. The intereolationships shot eoist hetween foil eso- ploymoet, decelopsmeot, oano growth oasoot he cospletely specified hy the graphs, hot the separatiost of concepts shot cosn he set footh shoold facilitate further stody. Oneo aspect of special Rote is the effect of chooging owotership of cesoorces. The "hwst" disteihotiost of iocowe is pot ino the context of happening ootr time rother than happeoiog is o period of timte. The discowiont of the "best" disteihotiont of incoeos withoot tpecifyinf she owoership of resources hos hoent one of the priocipol prohloms to welfae eonomics. Io the frostework of the soggested appeotch the peohlest is pot istto a woe dyonamic cootest which recognizes that the distrihotiost of inomwe (hest sor otherwise) is she eesolt of orgostizotiostal stroctoeso os well osof the oswnership ofesooecesatsty gienstperiod oftimoe,sstdthateenttheowterhip of resoocces set time is the ressult of she octuol distrihotiost of incosme ist pastperiods ofsimet. Althoogh the soggested opperoach to pubhic finance doss stot pro- vide o diogramsmotic frsaoewoth which sismplifles she considerotios stecoesey for the prohleom of price stahility, it woy pot shot prohlew intstonw context which hsspecilteit. Ist the framework she prices of prsoducts omay vary s log as she variation does stot affect she distribotiont of expendituresson prodctsosdasslongoasthe pice psid to the owners of cesources varies int accordance with the prices of prodocts without offectistg the distribution of iocomte. The level of onsey incomte sod price leels see lated hot do stot affect she cool intcomte and she cool level of prices. The problemo of price stability omay he ast importast factor in she deterwination of developmet and geowtsh hot ostly hecause price stahility wty offwct warhet astd politics1 structuccs, worket hnowledge, techoolofy, tostes sod prefereoces, etc. The prohlew of price stahility as it is osuslly stated also isvolves she redistrihotiont of istomwe frow those who see ost fisted iocowes to those whose incomwe earies with ecoowic costiions. The wodel of the soggested apprsoach oliwinates this ospect of she probhlew of price C wish foll owploywent. Ist this case foll ewploywestt woold be achies- ed by prodocing wore of public goods thast the society desired antd therefoee is ist cotfict with the goal of ecostooic development. The celatice effects of coomhinaotions A ond C oR ec0ooic gowtsh, bow- eer, woy he o differest wottec. Cowbnatison C wth foll ewploywent woy resolt int wore sor Iwos econtowic gowsth thast combhioation A. Agaist this is o qoestiost which is beyostd she boostds of this woo- groph. The potesttiol of forthec worh withist this framwworh appears to he very geaot. The inteelationships shot exist hetween foll emc- ploywent, deelopwet, sod growth canoot he cowpletely specified by she graphs, hot the seporatison of concepts that cost ho set footh shoold facilitate forther stody. Onte ospect of special ote is she effect of ehooging ownerosbip of cosoocces. The "hose" distoihotion of incowo is pot ino she cootest of hoppening over tiwe rother thso happestiog ino a period of tiwe. The diocowsion of the "host" dissrihotion of iocowe witboot specifying she owoership of ewoocos hos heeo one of she principol pobhleoms int wolfasee ecoomoics. to the fraeowork of she soggested apperoach the prohlew is pot ioto a wore dystawic conotext which recogoizes that the distrihoiont of iocowe (host sor otherwise) is she result of organtizotiotal stroctoros as well asof the owneroship of resourcos at asty given period of time, sod shot een she ownership of rewoorces oser tiwe is the result of the octool distoihotiont of incowe int past periodsofsiwe. Although she soggessed approach so puhlic finance doss tot pro- vide a diograwwstic framsewoth which simsplifies the cosiderations stecetsoay foe she probhlew of poice stahility, it woy pot shot prohlew into asnew contextswhich hasspecislwmerits.Inthe fraweworkhthe prices of prodocts way vary s long as she variation does ot affect she distrihotiont of ospenditoces o prodocts sod sonsg as the price poid to the owoers of rewources varies is occordaoce wish she prikes of prodocts withoot affectinf she discrihutiont of intcowe. The lotvel of woney incowesand piceleels areorelatedhbutdootssfectes real inowe sod the cool beve of poises. The probhlew of price stahility way he so important factor in tshe deterwioation of desvelopet sod growth hot oly hecoose price stohility way affect warhet sod politics1 structuccs, warhet knowledge, techolofy, tosses sstd preferences, etc. The probhlew of price stahility as itsis utually stated aso invoes the rodistrihotiont of intcowe frow those who see ost fisted iocomes to those whose incowe earois with coomwic costditiosts. The wodel of she suggested approach eliwioates this aspect of she probhlew of price 64 C wish foll ewpisymtsto. Io this cowe foll ewployment woold be achiee- ed by prodocing more of public goods than the society desired sod therefoeois in cooflict with the goal of coomoic deveolopment. The relatite effects of combioations A sod C son ocoomoic gewth, bow- eer, maoy ho a diffecent matter. Combhination C with foll emsployment woy rosoltoi wore sor loss ecoowic growth thao cowbinaotion A. Againt this tos aqoestion which is beyond the bsoonds of this wosto- gcoph. The potential of forthec worh withio this framwworkh oppoes to he vecy geaot. Tbhe ioterelotiooships shot esist hetweeo foll ow- ployweot, decelopmseos, sod gowth casoot he comsplosely specified by the graphs, hot the separation of concepts shot coo ho set tooth shoold facilitate forther stody. Oneo ospect of special ntote is she effect of chaogiog owoneship of cesooces. The "host" distribotion of inomwe is pot istt he context of happosing ser tiwe rother thao hoppoening ino a period of tiw. The discuswiot of she "host" distrihution of iocowe wishoot specifying the owoecship of cesoures hot hoot oneo of she princoipol prohlews to welfare ecoomodcs. Instshe fraework of the soggested approach she prohlow is pot itoo a woro dystawic cotet which recogotoes that the distriboiont of incowe (host sor otherwise) is she result of organtizstionaol stroctores as weoll s-of she ocwnership of resocsatsony givensperiodofime,adhatoeentheoweship of cosoocces 0v00 tiwe is the result of the sctoal distoihotion of iocoose to postsperiods ofsiwe. Although she suggested opproach to puhlic fioaoce does ot pro- vide a diograwmmotic frowewook which simsplifies the considoerstioos nteceswary foe the prshlew of poice stahility, it woy pot shot prohlew ito a stew cootext which hot speciol merits. In the fraeworkoc she prices of prodocts way vary s lfo asthe vaeiation does nost affect the distrihotiont of expeoditoros son prodocts antd sonsg as the poise poid to she owoecs of reooes varies to occodsstce with she poices of products withoos offecting she distrihotiont of incowe. The loevel of wontey intcome sod price bevcobs ore related hot do sot affect she cool incoeow sod she cool level of poices. The prohlew of price stability may be so imsportast factori to he deterwination of decelopmenot sod grotsh hot ostly hecause price shbiiy woy affect warhet sod political stroctues, waohet hnowledfe, techoology, tosses sstd preferences, etc. The prohlew of price stohbity ss it is usually stated ast involes she rodistrihotiost of istcowe frow those who sot ost flood iocowes to those whose incowe eareiw with ecoomoic conditisons. The wodol of the soggestod approach eliwiostes this aspect of the problew of price 64  APPLICATIONS OF THE SUGGESTED APPROACHES stability by the assumptions that all income is spent and that all in- come is derived from the use of productive resources in the production process. In the real world, money and the process of the creation of money are a source of money income to individuals. The result is that money income is redistributed from what it would be if money were neutral, as it is in the model. Thus, the existence of financial assets in a society is another reason why the optimum allocation of resources (100 per cent development) will not be achieved. As in- dividuals save by making financial investments (purchase financial assets), the money income earned by the owners of the factors of production is transferred into the hands of those who previously owned or created the financial assets. The new owners of the money income are the individuals who then demand products and determine the combination of private and public goods which should be produced. This distribution of income, like a distribution of income resulting from monopsony resource markets, would also affect the achievement of economic development and may have implications for economic growth. One approach which would bring money as a non-neutral factor into the model would be to accept money as a productive resource. In the real world, money is a necessary factor for the production process to operate efficiently, and the creation of money makes possible changes in market structures. However, the development of a transformation curve from isoquant analysis is very questionable if money is con- sidered one of the resources used in the production process. There appears to be no a priori basis for stating the shape of an isoquant with money as one of the resources. The answer to this problem is not within the scope of this mono- graph. However, it is apparent that leaving money neutral in the model may not be an adequate simulation of the real world because money, financial assets, and the process of creating money do affect the distribution of income which determines the demand for products. The inadequacies of the model are the same as most price theory models. Monetary effects are difficult to deal with in most resource allocation models. APPLICATIONS OF THE SUGGESTED APPROACHES stability by the assumptions that all income is spent and that all in- come is derived from the use of productive resources in the production process. In the real world, money and the process of the creation of money are a source of money income to individuals. The result is that money income is redistributed from what it would be if money were neutral, as it is in the model. Thus, the existence of financial assets in a society is another reason why the optimum allocation of resources (100 per cent development) will not be achieved. As in- dividuals save by making financial investments (purchase financial assets), the money income earned by the owners of the factors of production is transferred into the hands of those who previously owned or created the financial assets. The new owners of the money income are the individuals who then demand products and determine the combination of private and public goods which should be produced. This distribution of income, like a distribution of income resulting from monopsony resource markets, would also affect the achievement of economic development and may have implications for economic growth. One approach which would bring money as a non-neutral factor into the model would be to accept money as a productive resource. In the real world, money is a necessary factor for the production process to operate efficiently, and the creation of money makes possible changes in market structures. However, the development of a transformation curve from isoquant analysis is very questionable if money is con- sidered one of the resources used in the production process. There appears to be no a priori basis for stating the shape of an isoquant with money as one of the resources. The answer to this problem is not within the scope of this mono- graph. However, it is apparent that leaving money neutral in the model may not be an adequate simulation of the real world because money, financial assets, and the process of creating money do affect the distribution of income which determines the demand for products. The inadequacies of the model are the same as most price theory models. Monetary effects are difficult to deal with in most resource allocation models. APPLICATIONS OF THE SUGGESTED APPROACHES stability by the assumptions that all income is spent and that all in- come is derived from the use of productive resources in the production process. In the real world, money and the process of the creation of money are a source of money income to individuals. The result is that money income is redistributed from what it would be if money were neutral, as it is in the model. Thus, the existence of financial assets in a society is another reason why the optimum allocation of resources (100 per cent development) will not be achieved. As in- dividuals save by making financial investments (purchase financial assets), the money income earned by the owners of the factors of production is transferred into the hands of those who previously owned or created the financial assets. The new owners of the money income are the individuals who then demand products and determine the combination of private and public goods which should be produced. This distribution of income, like a distribution of income resulting from monopsony resource markets, would also affect the achievement of economic development and may have implications for economic growth. One approach which would bring money as a non-neutral factor into the model would be to accept money as a productive resource. In the real world, money is a necessary factor for the production process to operate efficiently, and the creation of money makes possible changes in market structures. However, the development of a transformation curve from isoquant analysis is very questionable if money is con- sidered one of the resources used in the production process. There appears to be no a priori basis for stating the shape of an isoquant with money as one of the resources. The answer to this problem is not within the scope of this mono- graph. However, it is apparent that leaving money neutral in the model may not be an adequate simulation of the real world because money, financial assets, and the process of creating money do affect the distribution of income which determines the demand for products. The inadequacies of the model are the same as most price theory models. Monetary effects are difficult to deal with in most resource allocation models. 65 65  7. OTHER APPLICATIONS OF THE THEORY In Chapter 6 an attempt was made to indicate areas of economics wherein we might make valid applications of the specific framework developed earlier in this monograph. The present chapter is also con- cerned with the application of the theory, but not within the specific framework developed here. First, two applications of the past will be commented upon, and then the prospects for future applications in general will be considered. The first of the past applications, as in the previous chapter, will deal with an area that may be more appropriately considered as political science. This application applies the price theory of public finance only in that it is an analysis of political behavior in terms of the traditional price theory assumption that individuals attempt to maximize their satisfaction. The second ap- plication does not involve an application to specific economic prob- lems, but rather represents one of the broadest applications of the terminology of price theory to public finance in general. EXISTING APPLICATIONS Buchanan and Tullock in The Calculus of Consent begin with the premise that political behavior, just as economic behavior, can be analyzed by making the assumption that individuals attempt to maxi- mize their satisfaction. Under this assumption it might follow that political polypoly would be considered the ideal form of governmental organization. This follows from the fact that with such a political structure the political mechanism works as efficiently as the purely competitive market structure, and the individual maximizes his satis- faction by equating the marginal utility per dollar's worth of all goods, including public goods. Buchanan and Tullock point out that a representative form of government (political oligopoly) is not inconsistent with rational be- havior of individuals, because there may be some costs associated with the act of collective decision-making.' There may be costs associated with obtaining any specified number of individuals to vote in favor of any particular proposal, and costs associated with the taking of a vote of all individuals on various quantities and various prices for . Page 44. 66 7. OTHER APPLICATIONS OF THE THEORY In Chapter 6 an attempt was made to indicate areas of economics wherein we might make valid applications of the specific framework developed earlier in this monograph. The present chapter is also con- cerned with the application of the theory, but not within the specific framework developed here. First, two applications of the past will be commented upon, and then the prospects for future applications in general will be considered. The first of the past applications, as in the previous chapter, will deal with an area that may be more appropriately considered as political science. This application applies the price theory of public finance only in that it is an analysis of political behavior in terms of the traditional price theory assumption that individuals attempt to maximize their satisfaction. The second ap- plication does not involve an application to specific economic prob- lems, but rather represents one of the broadest applications of the terminology of price theory to public finance in general. EXISTING APPLICATIONS Buchanan and Tullock in The Calculus of Consent begin with the premise that political behavior, just as economic behavior, can be analyzed by making the assumption that individuals attempt to maxi- mize their satisfaction. Under this assumption it might follow that political polypoly would be considered the ideal form of governmental organization. This follows from the fact that with such a political structure the political mechanism works as efficiently as the purely competitive market structure, and the individual maximizes his satis- faction by equating the marginal utility per dollar's worth of all goods, including public goods. Buchanan and Tullock point out that a representative form of government (political oligopoly) is not inconsistent with rational be- havior of individuals, because there may be some costs associated with the act of collective decision-making.' There may be costs associated with obtaining any specified number of individuals to vote in favor of any particular proposal, and costs associated with the taking of a vote of all individuals on various quantities and various prices for 1. Page 44. 66 7. OTHER APPLICATIONS OF THE THEORY In Chapter 6 an attempt was made to indicate areas of economics wherein we might make valid applications of the specific framework developed earlier in this monograph. The present chapter is also con- cerned with the application of the theory, but not within the specific framework developed here. First, two applications of the past will be commented upon, and then the prospects for future applications in general will be considered. The hrst of the past applications, as in the previous chapter, will deal with an area that may be more appropriately considered as political science. This application applies the price theory of public finance only in that it is an analysis of political behavior in terms of the traditional price theory assumption that individuals attempt to maximize their satisfaction. The second ap- plication does not involve an application to specific economic prob- lems, but rather represents one of the broadest applications of the terminology of price theory to public finance in general. EXISTING APPLICATIONS Buchanan and Tullock in The Calculus of Consent begin with the premise that political behavior, just as economic behavior, can be analyzed by making the assumption that individuals attempt to maxi- mize their satisfaction. Under this assumption it might follow that political polypoly would be considered the ideal form of governmental organization. This follows from the fact that with such a political structure the political mechanism works as efficiently as the purely competitive market structure, and the individual maximizes his satis- faction by equating the marginal utility per dollar's worth of all goods, including public goods. Buchanan and Tullock point out that a representative form of government (political oligopoly) is not inconsistent with rational be- havior of individuals, because there may be some costs associated with the act of collective decision-making.' There may be costs associated with obtaining any specified number of individuals to vote in favor of any particular proposal, and costs associated with the taking of a vote of all individuals on various quantities and various prices for 1. Page 44. 66  eaob public good. The costs coo be expeoted to incease mcore thas proportionotely oe the ooembee of individuolsioceses. Is obtoiing a specified numher of individools to vote in fovor of a particular proposal, the costs cos he eopected to inceose smoee than propor- tionately as the nomber of iodividools necessory to vote in faor of the peoposol inscreases. The unansimsity rule would, therefore, hove the geaosest oot of decisios-mskissg ossooioted softh it. Bochasos ood Tollock conscluded shot it cans he conssidered rationaol foe ans individuaol, ottempting to mosdmize his sotsfoctios, to peefee the represenstative foem of govecoenet over one which requies mossy individools to vote ons the sopply of eoch good pcodoced by the gosernesssat. This cooclosion is eves moss likely so hold troe if thers are addi- tiosol coostitutionol Poles essablishing o system of ohmcks osd bolostes which limit the fosctions of the vorioos heanohes of goveetnment, so thot thehrtsches ofgovertsmettoee somewhtoanlogoostto the morket orgaoioatiots' The fonctioo of the legislative hsoasoh coo be limited to she inteepretotion of the quanstity ansd peice of particolor goods desieed by inedividoolo of the society. The fousctions of the executive broanch coo ho limited to she determinsotios of how to combinse ce- iorcs s he production of the goods determined as desiroble by the legislotive braoch. The founctios of the jodicial bcosch cos be limited to she evolootios of whrther oc not the othec tins broanches of posesn- ment hove octed within all of the constitotiosol cules estoblished by she society. However, osnce essoblished, with she legislotive hboanch isterpret- ing the desires of oil inedividoals of the society, the reprsentatives shot woke op the legisltive branch may come under the pressures of minsority groups of idividls ognied so obtois eoclosice hensefits for the gerop which oce to he poid for by oil of the isdiiduools of the society.0 These pesscure groops are a naotorol outgrowth of she system, if the ossomptioss aoot cotiosol ecosomic behoviore e - cepted, becomse smoll gcoups of isdividuols fisd shot they cos goin 2. Poges 115-16. 3. Thesesoulesmayhe cosidredosdditionsltfctsoecosidered a esidesce shot colisicol pliocolyecasseist. 4. DeViti Deritco's conclosions shoot pressoe goupos see imwilae bst are stated interms ofhs ownframseorkosofais.Te pessue goupsaecn sideed so be cvidence of o mcnopolistic reeen is Eorsmest. He coscloded thatsif cpital-owsing pressure troops wein, higher prices most hr psid so peionte firms, and if taboe pressore goups win, higher peicms will hase so he paid is she fcrw of hither costs of ceodoction (Fiest Peisciples of Poblic Finaoce, p. 50). 67 eoch public good. Tbhe costs cos he exspected to incorease ssore thos proportionately os she nomber of individools isncreoses. Is obtoining a specified number of individuals so vote in fovor of a porticulor proposol, the costs coo be eopected to increose woe thoan propor- tionotely as the nombec of individuols necessocy to vote is fovor of the proposal increoses. The usosimity rule woold, therefore, hove she greotestostofdeisio-mokisg ossocited witi. Buchonon osd Tullock concluded shot it coo hr cossidered rotiosol for on individuol, attempting to moximioe his sosisfoctios, to prefec the representotive form of govecomest ovr one which requies mony isdividools to vote on the sopply of each good prodoced by she government.' This conclonios is eves moss likely so hold tcr if there ore oddi- tionol costsitusiosol soles estahlishisg o system of checks osd bolanscm which limit the fonotions of the vorious brasches of goveesment, so thot the brooches of govrmrot ore somewhat onologous to the morket orgoniootiosn? The fooction of the legislotive brooch con be limited to she interpretation of the qoontity ond price of porticular goods desired by indiciduols of the society. The founcticon of the executise brooch coo hr limited to the determisotios of how to combine re- iorcs s he production of the goods determined as desiroble by the legislotive brooch. The fooction of the jodiciol bronch coo he limited so the evoluotion of whether or not the othec two branches of govern- west hove octed within oll of the constitotionol cules estoblished by she society. However, once estoblished, with the legislotise brasch interpret- ing she desices of all individuls of the society, the cepresestatives shot woke op the legislotive brooch moy come ndes the pressures of minority groups of individuals organized to obtain eoclusive benefits foe the group which are so bs poid for by oll of the individuaols of the society.0 These pressure groops ore a notorol otgrowth of the system, it the ossumptions aout rotionol economic behasior mreac cepted, becomse smaoll groups of individuols hond thot they coo goin 2. Pnges 15-6.t 3.Tese roles moy hr considered Os odditional factors so bs considered as evidence shot ptoliticol pliopolc cot exis. 4. DeViti DeMacco's cooclosicons ohout pressuretroops ore similar hotar sttd insescsofismowntraomeorkofanlsis. The pressure groupsare con- sidred so bs evidence cita monopolistic element in Eovrrment. He concloded tot it capital-ownint presse groupswin, higher pokces most be psidrto private frms and if laon pressure troops win, highter prices will hoe to be paid is the formofc higher costs ot production (First Peisciples of Poblic Finaoce, p. 501. 67 etch poblic good. The costs coo be eopected to increoss more thon proportionotely os she sombr of individoals icress. Is obtoising a specified number of individuals to vote in fovor of a particulor proposal, the costs con he eopected to increose more thoo propor- tionately as the nombec of individuols necessocy to vote in fovor of she proposol increases. The unonimity role woold, therefore, hove the greotest cost of decision-mokiog associoted with it. Buchonam ond Tollock concloded shot it coo he considered rotiooal for on individuol, ottempting to moximie his sosisfaction, so prefer the representotise form of government over one which requirrs mossy individools to vote on she supply of eoch good prodoced by she gosrrnmeot.n This conclosion is even moss likely to hold tcue if thece ore oddi- tionol constitusionol soles estohlishing o system of checks osd holances which limit she fuoctions of the varinous brooches of government, so thot the brooches of government ore somewhat anologous to the morket ocgonitttioo.0 The fooctios of the legislotive hronch coo be limited to she interpretotion of the quantity and price of porticulor goods desired by individools of she society. The foncsion of the executive brooch cookse limited to she desermisotion of how to combine re- sources is she production of the goods determined as desiroble by the legislosive brooch. The fooction of the judicil bronch coo he limited to the evolootion of whether or sot she othec two brooches of gosern- west hove toted withis oll of the constitotionol cules establiosd by the society. However, once estoblished, with the legislotive hranch interpret- ing she desirs of oll iodividuols of the society, the ceprseattives thos mokeoupthe legislotivehbroochmay comeounder the pressres of minority groups of individuals organized to obtoin exclusive benefits for she group which are to hr poid for by alt of the individuols of she society.4 Theme pmrergroups ore a notural outgrowth of the system, it the ossomptions aout rotionol economic behavior are ac- cepsed, beoouse smoll goups of individuals find thot they coo gain 2. Poges 115.10. 3.Tese sols may he considtred as addtitional factors so bs considered as evidence shot polisicot pliopolc con cxist. 4. DeViti DeMocco's onclusions shoot pressue groops ore similar hot are stated inoesctofis onframork ofantysis. The pressoer oupsoarecon- sidred so bs evidence otta onopolistic element in coversment. Hr concloded toat if capital-ownoing pressorc gouposwin, higher prices moot he paid to peicote foot, nd it lao pessore goups wn, higher peices mill boos to he paid io she forw of higher coots of productin (First Principles of Colie Finane, p. 501. 67  o benefis thanoi losts themH to organize and obtain she benefits.' The resole is shoe she constitutional coles establishiog she cepsesentative form of governmen~t do Hot operate as they ere intended to operate. The benefits froms she goods supplied by she governent become sepa- roted from she cools (toxes). The moojority of she society, rother thao she miocity of she society, moss adjoss shoic private consumptioH so maximize thesr esisfactioo as o resole of she goveromeot sopply of goods. Bochanasn sod Tollock soggest she adoption of o polioy rule sch wcould require all goods shoe benefit a particular minority groop be paid for by special taxation of aoshec equal in size miority group. The logic of shis role is that in this -maooer couoteccailiog posoers would he established weithout causing a forthec growth of either poscer.6 Bochaoao sod Tolloch also coosider she poeoibility shoe oo mottee which of she possible coostistusiooal aod policy roles eoist, coeecioo moyoseoisteosloogasoonaoimity eisscooceroiogstheroles. Iother woods, os loog as each individual inothe soiety agrees shoe she ruoes shoold exst, is coo he omoumed shoe shey heliese shoe she gains Is he derived fromo chaoging to any olteroative set of cues do ot equal she cools of makiog she chasge.8 Howevec, a poiot ot considered is shoe soeof she costs of chaogiog toan soalterootive wet of coostitotional cules may he she direct resolt of she eoistiog constitutional roles rerd- ing the process oecessery inorcdee to ohsaio a chooge. Thie loss poiot may he a basis for she chaoges he she interpretotioo of the Coostitotion in she United States during receot yeses. The process of changing she Coostitotion is difficols sod iosolses costs wchiche coo he ocoided by sim- ply haviog she Supceme Coors reinterpret she esistiog Coostitotioo io each a waoy as to accomplish the chaoges shot she indiv~iduals of society wcoold write inos the Coonsitotioo if she costs of doiog so weee ot so grest. Io soy cose she work of Bochooao ood Tollock is so intecesting applicationsofooe ofthe bsicasoumptioos of pricesheorystosthceoe of political behacior. Is pos political hehavioc ioto a fesame of eefeceoce shoe she economist shoold be able to understand more clearly sod should be msre williog to accept. Is als providees amixing of tecrminol- ogy from she two fields which should lead so a better uodecrsodiog af coocepts io bash fields of study. 5. Buchanam sod Tulleek, pp. 206087. 6. Pages 201.94. 7. Pages 270.53. 8. Pages 260-62. more in benefis thao is costs them to organize sod obtaio she benefis.' The resale is shoe she coostitutiooal cules establishiog she represeotative form of goeromeot do ot opecate s shey wcere ioteoded to operate. The benefits fcom she goods sapplied by she goernmeot become sepa- cated frees she costs (eases). The majority of she society, rasher thao she mioeity of she sciety, mast adjuest theic pcivate coosumption so maximize sheie satisfactioo as a resale of she foereoneo supply of goads. Buchaoao aod Tulloch eaggest she adoptioo of a policy role which would require all goods shoe benefit a paeticalar minority group be paid for by speoial taxation of aotshec equal in size miority groap. The logic of shis cale is shoe io this. maooec csotecvailiog powers woold be established without causiog a further growthb of either powcer.' Buchaoao sod Tollech also coosider she possibility chat oo macwer which of she possible coostitsstioal sod policy roles raise, oecion mayot exiesasloogaoooaimityeisscocecoiogstherles. Ioher wards, as lsong s each indiv'idual in she society ogress shoe she roles should exist, is coo be assuoed shot shey believe shoe she gaios so be drived from chaogiog to soy altecoative et of eules do ot equal she costs of making she chasge.8 However, a point ot considered is shoe soeof she costs of chaogiog so so altecoatise wet of coestitotiooal roles may be she direct resale of she exstiog coostitutional roles regard- fog she prcesecessary inorsdec to obtaio a chaoge. This last poiot may he a basis for she chaoges io she ioteepretationo f she Csonstisatioo in she United States durinog receot years. The process of chaogiog she Coostitution is difficuls sod inolves osts whioh coo he avoided by sim- ply haviog the Supresoe Cases eioteepret the existiog Coostitotion io suchsawaystasccomplishshe chaoges thatthe individuals of society wcould write ino she Consitution if she costs of doing so were ot so geal. In soy case she worko of Buchaaad Tullock is so ioterestiog applicasion of ooe of she basic asumptions of price sheocy so she area of political behavior. Is pos politicsl hehavior into a fcsme of refeceoce shoe she ecoomist shoold he able to undersaod more clearly sod should be mere willing to accept. Is alsm provides a mixing of teerminol- egy from she Iwo fields which should lead so a betsec uoderstaodisg of cooceps io bosh fields of study. 5. Buchanan sod Tullesh, cc. 286.87. 6. Pages 291-94. 7. Pages 250507. 0. Pages 260-A2. 68 more in beoefits thao it costs shems to organize sod obtain she benefis.' The resole is shoe she coostitutiooal roles esablishiog she representative form of goveromeot doots operate s shey wece ioteoded to operate. The beoefits fceom she goods supplied by she goveromeot become sepa- rated from she cases (eases). The majority of the society, rsther thao the mioority of she society, mast adjust their private coosumptieon so masimize ther satisfaction as a resole of she govecomeot supply of goeds. Buchaoao sod Tulloch saggest the adoption of a policy role which would requice all goods shoe benefit a particular minority group be paid for by epecial taxation of aotshee equal in ese miority group. The logic of shis role is shoe io shis. massoer counoervcailiog powecs would be established wishout causiog a furshec growth of either power.6 Buchaoao sod Tollock also coosider she possibility that o matter which of she possible costitutional sod policy roles eis, coercion mayoteist slogasounoimity eisscocerigheales. Ioher words, s loog as each individal inothe society agrees shoe she roles should mxist, is coo be assomed shoe shey beliese thas she gaioe so be derived from chaogiog to soy alteroative set of roles do ot equal she coss of makiog she chaoge.8 However, a point not coosidered is shoe soeof she coss of chaogiog to so aleroative met of constitutionl roles may be she direct result of she esistiog coostitutional roles regard- ing she prcess necessary in order to obtain a chaoge. This last poiot eay he ohmaic for she chaoges io she ioteepretation ef she Coostisution io the Unoited States duriog receot yeses. The process of chaogiog she Coostitutioo is difficult sod iovolves ccss which coo he aocided by sim- ply haviog she Supceme Coueareioterpret she existiog Coonstitutioo io each a way as to accomplish the chaoges shot she individuals of society would wrcite inoa she Coostitution if she costs of doing so wece ot so great. In soy case she wock of Buchaoao sod Tullock is so interesting application of one of the basic assumptions of price sheory to she aces of political behavior. Is pos political hehavioc ioto a fcame of refeceoce shoe the ecoomeist shoold be able so undecstaod moce clearly sod should be mere wcilliog to accept. It als provides a mixing of termiol- ogy from she two fields which should lead to a betsec uoderstaoding of conceps is bosh fields of study. 5. Buchanao sod Tulseek, cc. 286.87. 6. Pages 290-04. 7. Pasges 250-57. 0. Pages 260-62. W8  OTHER APPLICATIONS OF THE THEORY Antonio DeViti DeMarco in First Principles of Public Finance pro- vides an example of the application of the terminology of price theory to the field of public economics. He does not develop a specific model but merely applies the models and concepts of price theory to his ex- planation of public finance concepts and to the history of public finance. Therefore, his application primarily deals with the tax side, but he does carefully state that public finance is not just the study of tax- ation, politics, or law. "The discipline which gives the really necessary and fundamental explanation of the phenomena of public finance is, however, economics."s DeViti DeMarco's definition of public finance or public economics gives a still better indication of the extent to which he would apply price or value theory to the public sector of the econ- omy. Public economics "investigates the conditions to which the pro- ductive activity of the State must be subjected in order that the choice of the public services which are produced, the determination of their respective amounts, the distribution of the costs among the consumers, etc., may take place according to the principles of theory of value- that is, with the least possible waste of private wealth, in order to at- tain the greatest satisfaction of collective needs."lo This definition contains all of the elements of the voluntary exchange or price theory of public finance. All three of the economic problems related to public finance are specifically stated in relation to the prin- ciples of the theory of value (price theory). The function and goal of public economics is to investigate the means of attaining the greatest satisfaction of collective needs with the least possible waste of private wealth. The relationship of this function and goal to price theory is obvious. Also, the definition considers the state as a producer of goods and services and the taxpayer as a consumer. The state is a producer of goods and services not just when the goods resemble goods which can be supplied through the market mechanism but whenever the state satisfies collective needs. Public goods and services are classified as either "Special Public Services" or "General Public Services." A public good is in the for- mer classification if it meets both of the following criteria: (1) the supply of the service must be technically divisible into salable units; (2) the service must be constantly demanded by individuals." Public 9. Page 34. 10. Page 36. 11. DeViti DeMarco believes that some services such as public safety are an example of a service which is not constantly demanded by individuals. The de- 69 OTHER APPLICATIONS OF THE THEORY Antonio DeViti DeMarco in First Principles of Public Finance pro- vides an example of the application of the terminology of price theory to the field of public economics. He does not develop a specific model but merely applies the models and concepts of price theory to his ex- planation of public finance concepts and to the history of public finance. Therefore, his application primarily deals with the tax side, but he does carefully state that public finance is not just the study of tax- ation, politics, or law. "The discipline which gives the really necessary and fundamental explanation of the phenomena of public finance is, however, economics."* DeViti DeMarco's definition of public finance or public economics gives a still better indication of the extent to which he would apply price or value theory to the public sector of the econ- omy. Public economics "investigates the conditions to which the pro- ductive activity of the State must be subjected in order that the choice of the public services which are produced, the determination of their respective amounts, the distribution of the costs among the consumers, etc., may take place according to the principles of theory of value- that is, with the least possible waste of private wealth, in order to at- tain the greatest satisfaction of collective needs."0 This definition contains all of the elements of the voluntary exchange or price theory of public fiwance. All three of the economic problems related to public finance are specifically stated in relation to the prin- ciples of the theory of value (price theory). The function and goal of public economics is to investigate the means of attaining the greatest satisfaction of collective needs with the least possible waste of private wealth. The relationship of this function and goal to price theory is obvious. Also, the definition considers the state as a producer of goods and services and the taxpayer as a consumer. The state is a producer of goods and services not just when the goods resemble goods which can be supplied through the market mechanism but whenever the state satisfies collective needs. Public goods and services are classified as either "Special Public Services" or "General Public Services." A public good is in the for- mer classification if it meets both of the following criteria: (1) the supply of the service must be technically divisible into salable units; (2) the service must be constantly demanded by individuals." Public 9. Page 34. 10. Page 36. 1L DeViti DeMarco believes that some services such as public safety are an example of a service which is not constantly demanded by individuals. The de- 69 OTHER APPLICATIONS OF THE THEORY Antonio DeViti DeMarco in First Principles of Public Finance pro- vides an example of the application of the terminology of price theory to the field of public economics. He does not develop a specific model but merely applies the models and concepts of price theory to his ex- planation of public finance concepts and to the history of public finance. Therefore, his application primarily deals with the tax side, but he does carefully state that public finance is not just the study of tax- ation, politics, or law. "The discipline which gives the really necessary and fundamental explanation of the phenomena of public finance is, however, economics."' DeViti DeMarco's definition of public finance or public economics gives a still better indication of the extent to which he would apply price or value theory to the public sector of the econ- omy. Public economics "investigates the conditions to which the pro- ductive activity of the State must be subjected in order that the choice of the public services which are produced, the determination of their respective amounts, the distribution of the costs among the consumers, etc., may take place according to the principles of theory of value- that is, with the least possible waste of private wealth, in order to at- tain the greatest satisfaction of collective needs."0 This definition contains all of the elements of the voluntary exchange or price theory of public finance. All three of the economic problems related to public finance are specifically stated in relation to the prin- ciples of the theory of value (price theory). The function and goal of public economics is to investigate the means of attaining the greatest satisfaction of collective needs with the least possible waste of private wealth. The relationship of this function and goal to price theory is obvious. Also, the definition considers the state as a producer of goods and services and the taxpayer as a consumer. The state is a producer of goods and services not just when the goods resemble goods which can be supplied through the market mechanism but whenever the state satisfies collective needs. Public goods and services are classified as either "Special Public Services" or "General Public Services." A public good is in the for- mer classification if it meets both of the following criteria: (1) the supply of the service must be technically divisible into salable units; (2) the service must be constantly demanded by individuals." Public 9. Page 34. 10. Page 36. 1L DeViti DeMarco believes that some services such as public safety are an example of a service which is not constantly demanded by individuals. The de  goods and services fall into the second classification if they do not meet both of the foregoing orteria. Special pobfic seevices require fee type peicing whioh makes their suppy somewatoanaogos to prvategoods and servicesHowevee, siEce the goveerment cn act msoopolistically in the supply of poblic goodsoand servtcesa roleof aveeage cost pricing tmostbe adopted by the governIment. Getneral poblic services, oR the other bond, aemr unique in that they ae generally sopplied by the goveernment aod leuieaoa type of peicing. With geseral pubfio servics, individual caosption is as unktnowo quontity. Howevee, this does Rot eule oat the ose of value theory is answering the econom~ic quesions about their supply. Cosoopiono caR he amssed to be peoportionate 10icoe It is OR asstamption, hot DeViti DeMarco cootetnds that it has both OR emopirical and alogialfoundatio. Basiog it as this assumsptioo, DeViti DeMarco deefops a coocept of iodividoal oet iscotoe. The coocept is asofogous to the valoe added concept of gross national product in that iodividual set incomsescan he susmoedto arrive at aeasure ofsnationalincrome.No incomeis tohbe coonted twice, aod nto income is to he deducted wchich is not counted as iscotoe of sosse other isdioidual. Developed io this maORner, iodividoal set iocomeis cosidfered ao iodicatioo of conosomptioo aod, therefore, the omeasure ofiodiidaftaahleictome. If the suos of theiodividual tao. ahfe iscomes is greater thao oatiooal inomse, douhle taoatioo eoists. If the som of the iodividaf taxahle income is less thas oatiooal income, peice discriminatioo eoists io the supply of pohlic goods aod sersices. Price discriinatioo eats exist because cf the tmooopolistic natare of the goverooseot io the supply of goods and services. Hoswever, DeViti DeMarco also recogoizes thas she siogle tao-pokce is based opoo the coo- cepts of pureecompetition aod that caee most be used io its application to public goods and servicesMuftipfe peiciog does notsecessaeily meao price disceimination exists, accoediog to DeViti DeMarco. Pokce dis- criminatios only occurs with geseral public services wshen as iodivid- ual oet iscome is not taxed on a proportionate basis with off other iodisidual Ret incomes. Mulsiple pricing, therefore, eoists foe geseral public services io thas different individuals pay differeot prices, bat price discrimioationonoly occurs when OR individual taxable income re- mand only recusenbe rublic safety is actally impaired. Danger is alwasys pel- ens has the isdividual droand for rotoction is doromant sont she danger is recogoized hy the fsct tha th sb ervice has Rot hero supptied and someone's safety hos sat heem oroteotsd. goods aod sersices fall into the second classificatios if they do not meet both of the foregoisg criteria. Special poblic sersices require fee type pricing which makes their supply somewhat asalogos to private goods ad services.However, sisce the goveroment coo act monopolistically io the supply of public goods asd sersvicesa ruleof average cost pricisg must be adopted by she goversmest. Getseral poblic services, oR the other hasd, are more unique is that they are geerally supplied by the government and reqoire aotas type of pricing. With georal public services, isdividual cosumptioo i5s asukoows qaotity. Howeser, this does sat role oat theouseofvle thryinnswerig thecoomic qestiosaboutsthir supply. Cosomptios coo be amssed to be propoetiooate to income. It is OR amsumptioo, hot DeViti DeMarco contends that it has both a empirical assd a logical foundation. Basisg it oo this assumptison, DeViti DeMaeco develops o coscept of individual set incomr. The coocept is asalogoos to the value added concept of gross sational product is that indivdoal Ret incomes can be summed to arrive at ameasutreof national income. No income isto be cousted twice, and nsoincome is to be dedocted which is not counted as iscome of some other individual. Drvrloped in this masser, indisidual set iocome isosidered an iodication of consumptios and, therefore, the measurrf idividoaltaoable icome. If the sum of theitdividual too- able incomes is greater thao satiooal ioncome, doable taxation roists. If the susm of the iodividsual taxable iscome is lress thas natiosal icome, price diwcrimitsotion exists in the sstpply of public goeds asd services. Price discriminatioo ran exist because of the mtonopolistic satue of the governmest in the supply of goods and services. However, DeViti DeMarco also recogoizes that the siogle tao-price is based upon the cos- cepts of pore competitios aod that care mast be osed is its applicatioo to public goods and services. Multiple priciog doessnotnecessarily meas prior diwcrimisation eoists, accordisg to DeViti DeMarco. Price dir- crimioation only ocoors with grorral poblic services when an individ- ual set income is sat toned on a proportiosate basis with all other irdividoal set incomes. Multiple pricing, therefore, exists for geneal public services is that diffeent individuals pay different prices, has pricr discriminationoonly occurs whenansindividual taxable incomere. mand oslcrecursnwhen poblic safetyisactaly impaired Dngrslwys prs- rot bos she indioidual demnd for rostection is dormant untilA she daoger is recognised hy the foct chat she service has sss hers supplied land someone's safety has not hem potected. 70 goods and services fall into the second classification if they do sot meet both of the foregoing criteria. Special public services require fee type pricing which makes their sopply somewhat asalogous to private goods and srvices. However, sisce the government cas act monopolistically is the supply of poblic goods asd serrvicesa role of average cost pricing muttobe adopted by the governmest. General poblic services, on the othr hasd, are more unique in that they ore generally supplied by the goversmest and reqoire altao type of pricisg. Wish geseral poblic services, individual cosumption is an unknown quaotity. Hcwever, this do es not role out the ose of valuectheory in answering the economic questions about their sopply. Cosumption can be assumed to be proportiosate to income. It is as assumption, hot DeViti DeMarco contends that it has both an empirical asd a logical foondatios. Basisg it on this assumptios, DeViti DeMarco develops a coscept of iodividual set iscome. The conscept is asalogoos to the valor added concept of gross notional prodoct is that individoal Ret incomes con be summed to arrive at a measore of notional income. No income is to be coonted twice, and 00 income is to hr deducted which is not coonted as iscome of some other iodividoal. Developed in this manser, iodis-idoal set iscome is cosiderod oo indication of ccnsumption and, therefore, the maueof iodividoal taoable income. If the sam of the iodividual too- oble incomes is geater than sacional iscome, doable taxation eoists. If the som of the isdividual taoable income is less thos natiosal icome, price discrimination eoists in the supply of poblic goeds asd services. Prior discrimisatios coo exst because of she monopolistic sobue of the gocersmest in the supply of goodo and services. However, DeViti DeMorco also recognizes that the single tao-price is based opon the cos- cepts of pore competitios and that core mast be used io its applicotioo to public goods asd services. Multiplerpricing does nos necessarily mean price diwcrimisatios exsts, accordisg to DeViti DeMarco. Price dis- crimisation only occors with general poblic services whes as iodivid- oaf set income is not tooed on a proportiosate basis with off other individsal oet incomes. Moltiple pricing, therefore, eoists foe genral poblicoervices io that different isdividals pay different prices, hot price discriminatios oly occurs whes 00 individoal taoable income re mandconlyrecursowhen publio safetycisactualynimpied.Danger isolwasrv- hasbu the individual demoand foe potection is dormant until the dngcer is eognaised by- the foes thas she service has not been supplied osd someoes 11fety has Rot hemn orosected. 70  ceiv'es special tetoet.12 Multiplepricing popootionatseto indiidul taxable incomse is bosed oR consumsption and theseby follosR the con- cepts of valtus theory. Multiple pricing based on speciol treatmsest of particolar individual taooble iRcomes5 is the rsuls of the onopolistic natore of the goernmsent iR the sopply of goods sod services, sod sa css of poise dissoimioation. Likewise, is the sopply of opesial poblis servics, multiple pr~icig may omayynothbeeidencesofprie discim- ioation, depesdiog uon sosheer sor not it isoorsuolt of tbs ssonopo. listic Rotors of the goseossmest is the sopply of these goods. Whes msol- tiplepricisg eissbecase ofdiffeeniloss,picesdisciintion doessnot eist. Is fact, is thisocse aosisgle price ouold osuolt is poise discoimoisotios. Howoeser, if smoltipls poicisg eoists is the supply of spe- ciol public seosises only s aoresult of the sosopoliostio oatoro of the goverssoest soppiy, the moltiple prising does result is poise dissrism- isatios. The oossept of groopisg simoilse special poblic serv~ices sogetheo asd osing s smoltiple poising tesboiqos so shot she total coot eqoas total hoeneisbsed opos the onoopolistis sotoe of the sopply of poblic goods, sod therefooe constitotes a foom of pokce disseimioosios.50 Usisg too poisisg for spesial public srvises o attempting to sopply geserol poblic serices by using a fee typo pricing system also is hosed on the mosopolistic sotooe of goverosment, asd is o loom of poise dissoimiss- tios. Also, the cossept of usisg the total bodget of the govrenoet, wohish isslodes hoth spesial osd geneosl poblis seesises, s a bosis foe the sopply of publis goods wouold oesult is poise disoriminotion. However, the totol bodget of jost genral poblis services is to be osed s a basis for the determinotion of wshot to poodose, how muosh to pooduoe, sod boss muosh tochooge. Here individoal cosuomptios isssoumed to be propoetiosote to iodividoal set iscomse, sod the som of oil individual net inosmsshould eqoaloaional income. DeViti DeMaroso wook representso soser of Italian ecsoomiss which tssw a fairly woide applisation of poise theory sonsepts to the field of poblic finance sod to some exotent soosig oserotheooreaofpolitical sience. The woek of Maiffeo Pantaleoi is so example of the lattee. The era, howesver, died ot, sod this type of boad opplisotion of poise she- sory concepts sod teermiology to public finanse sod she political ogan- ization bas to some extent died wish it. The wooks of Wicsell, Lindahl, Bosses, Kofoglis, Boshanan, sod Tollock ore modeon eoamples of appli- 12. Pagso 114-5. 13. Poses O1-88. 71 ceivesspecial teosseott2Multiple pricing poortionateto indiidul taxable insome is booed son sosuomption sod thereby folloso the con- cepts of salue theory. Moltiple pricing booed son special treatment of psotisolae indisidoal sooable insomes is she resolt of the moopolistis natore of the government is the supply of goods sod sersicss, sod isa sase of poise discriminatio. Likewise, is she sopply of spesial poblic services, moltiplspricing mayorsmayotbeseidencesf pie disrim ination, depending opon whetbee or sot it is a resolt of she monopo- lisissnasore of she goveroment is she sopply of shese goods. When insl- tiple poicing exiosts besause of differential rosts, poise disrimination doesnot eist. Is fact, insthisscase aosingle poise would result is poise discrimination. Howevee, if moltiple prising exsts is the supply of spe. sial publis sersises only s aresolt of she monopolistis natore of the gosrnment sopply, the molsiple peicing doss result is poise dissoim- inotion5. The sonseps of grouping siomilse specils poblic servics together sod osing a multiple prising teshoiqoe so shot tbe total cst eqoals total reeoueis hosed upon the onoopolistis natore of she sopply of poblic goods, sod therefore sonstisutes a foorm of poise disimisssios.1t Ulsing too prisiog for spesial publis serises sor attemptiog to sopply general poblics ervics by osiog a fee type prising systeom also is booed son the monopolisticnatore of government,sandisforom f pie discimoin- tion. Also, the sonsept of osing she total hodges of the gorernmsent, which inslodes both special sod geneoal poblik servskes, s a books foe the sopply of publis goods woold rsuolt is poise discrimsination. Howsever, the total hodges of jost general publkc services is to be osed s a basis for the deteminaton of what to prodose, how muoch to prodoce, sod boss mosh ocharge. Here indisidoal sonsomption isssoumed so bs proportionate to iodividual set insome, sod the soum of oil individual net inosrshould equlnaionaliome. DeViti DeMarso's work oepresentso soser of Italion ecsoomiss which sow a fairly wide applisation of poise theory coosepts to the field of poblic finanse sod to some eotent srossing over to she ores of polisisal siense. The woek of Moifro Pansalesni is so roample of the losses. The ers, hossesee, died sout, sod this type of brood applisation of pekce the- oey soosepts sod termioislogy to poblis finanse sod she politisal organ- ization boo to some rxtent died with it. The works of Wiksell, Lindahl, Bosses, Kafoglis, Bosbanon, sod Tollocsk ore mod ero eoamples of appli- 12. Pogs 104-15. 13. Poges 00008. 71 ceives spesial tseotmsot.1t Mohtiple prising psopsorionate to iodividoal taoable insoms is hosed son sonsomption sod thereby follows the con- septs of volos theory. Multiple pricing hosed on special tseatment of partisoloe individoal taxable iosomes is the resolt of she moopolistic satore of the government is she supply of goods sod servics, sod isoa sase of poise discriminotion. Likewsiss, is the sopply of spesial poblic servicsm,multiple pricing mayormayotsbseseidenceof pie disrim- ination, depsoding opon whether or not it issaoesolt of the monopo- lostsc natore of she goveenment is she sopply of shese goods. When insl- tiple prking estsbecase ofdiffeeiaolss, pkriedisriminaion doesotsexist. Ifact, inthis cse asigle pricewold resltinspokce discriminatiso. Hossevee, if moltiple prising exsss is she sopply of spe- sial poblis sersices only as a resolt of she moopolistic ostore of the gosernmeot sopply, the multiple psising do es result is poise dissrim- ination. The coosept of grooping similar spesial poblic services together sod osiog a moltiple prisiog tesboiqoe so that tke total cst eqoals total ereoonek hobsed opon she moopolissis natose of she sopply of poblkc goods, sod therefore sonstitotes a form of poise disiminatio."0 Using too prising for special poblis srviss sor attempting to sopply genrol poblis serie by osing a lee type priig system also is booed on the moopolistic natore of governmeot, sod is a form of poise discrimina- tion. Also, the soocept of osing the total hodget of the goveromeot, whisk inslodes both spesial sod general poblicsevses, s a bosis foe she sopply of poblis goods woold remolt to prkse disriminatio. Howevee, the totol hodges of just genseral poblkc servises is to be osed s a basis for the determination of what to prodose, how moch so produse, sod how mosh toscharge. Hess iodiridoal scosumpktio omossmed so bs psoportisote to iodividool set inosme, sod ohs som of all iodividool set incomes shoold eqoal oational insome. DsVisi DeMarco's work sepresents so era of Italion economics which sow a fairly wide applisation of peise theory concepts to the field of poblis fioanse osd to some eotent srossiog ossr so she ores of politisal siense. The work of Maffeo Pantsleoni is so example of the lottes. The ers, however, died sout, sod this type of brood applisasion of peise she- ory consepts sod terminology to poblis flosse sod she political organ- ization hoe to some extent died with it. The ssorks of Wicsell, Lindahl, Bosses, Kafoglis, Boshanon, sod Tollosk ore modern examples of appli- 12. Poses 114.5. 13. Pages 81-88.  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE cation, but none of these carry the application of price theory terminol- ogy as far as did DeViti DeMarco. FUTURE APPLICATION The applicability and limitations of the price theory of public finance to three broad areas of study are considered in the remainder of this chapter. The three areas of application are (1) as an explanation of the real world, (2) as a framework for policy proposals, and (3) as a framework for discussing concepts of public finance. The political mechanism which is necessary for the government to be able to provide an optimum allocation of resources is not likely to exist in the real world. Therefore, political polypoly is not an explanation of the operation of the political process in the real world. Neither is the optimum allocation of resources model an explanation of the actual allocation of resources by the government in the real world. These lim- itations are obvious to even the casual observer of the actual political process who understands the necessary conditions of political polypoly and of the optimum allocation of resources model. However, this con- sideration does not have to affect the acceptance of the price theory of public finance as an explanation of real-world events. The same type of observations can be made in relation to the pure competition model and the real-world market situations. Market oligopoly is the most likely market situation in the real world, just as political oligopoly is the most likely political situation. The difference which affects the relative ac- ceptability of the two frameworks of analysis lies in the fact that the economic implications of market oligopoly have been developed and studied by leading economists of England and the United States, while the economic implications of political oligopoly have never been system- atically set forth. The development of precise definitions for, and of analysis of the economic implications of, political situations is essential to the future application of the price theory of public finance to real- world situations. The political polypoly model which does provide an optimum allo- cation of resources is important to economic analysis, even if it does not provide an explanation of the operation of the real-world political processo oof the operation of the real-world allocation of resources to public goods. In a democratic representative society it is likely that the general principles of the optimum allocation of resources model can be applied to specific real-world allocation problems. In any case, there is no apparent reason why the tools of price theory 72 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE cation, but none of these carry the application of price theory terminol- ogy as far as did DeViti DeMarco. FUTURE APPLICATION The applicability and limitations of the price theory of public finance to three broad areas of study are considered in the remainder of this chapter. The three areas of application are (1) as an explanation of the real world, (2) as a framework for policy proposals, and (3) as a framework for discussing concepts of public finance. The political mechanism which is necessary for the government to be able to provide an optimum allocation of resources is not likely to exist in the real world. Therefore, political polypoly is not an explanation of the operation of the political process in the real world. Neither is the optimum allocation of resources model an explanation of the actual allocation of resources by the government in the real world. These lim- itations are obvious to even the casual observer of the actual political process who understands the necessary conditions of political polypoly and of the optimum allocation of resources model. However, this con- sideration does not have to affect the acceptance of the price theory of public finance as an explanation of real-world events. The same type of observations can be made in relation to the pure competition model and the real-world market situations. Market oligopoly is the most likely market situation in the real world, just as political oligopoly is the most likely political situation. The difference which affects the relative ac- ceptability of the two frameworks of analysis lies in the fact that the economic implications of market oligopoly have been developed and studied by leading economists of England and the United States, while the economic implications of political oligopoly have never been system- atically set forth. The development of precise definitions for, and of analysis of the economic implications of, political situations is essential to the future application of the price theory of public finance to real. world situations. The political polypoly model which does provide an optimum allo- cation of resources is important to economic analysis, even if it does not provide an explanation of the operation of the real-world political process or of the operation of the real-world allocation of resources to public goods. In a democratic representative society it is likely that the general principles of the optimum allocation of resources model can be applied to specific real-world allocation problems. In any case, there is no apparent reason why the tools of price theory 72 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE cation, but none of these carry the application of price theory terminol- ogy as far as did DeViti DeMarco. FUTURE APPLICATION The applicability and limitations of the price theory of public finance to three broad areas of study are considered in the remainder of this chapter. The three areas of application are (1) as an explanation of the real world, (2) as a framework for policy proposals, and (3) as a framework for discussing concepts of public finance. The political mechanism which is necessary for the government to be able to provide an optimum allocation of resources is not likely to exist in the real world. Therefore, political polypoly is not an explanation of the operation of the political process in the real world. Neither is the optimum allocation of resources model an explanation of the actual allocation of resources by the government in the real world. These lim- itations are obvious to even the casual observer of the actual political process who understands the necessary conditions of political polypoly and of the optimum allocation of resources model. However, this con- sideration does not have to affect the acceptance of the price theory of public finance as an explanation of real-world events. The same type of observations can be made in relation to the pure competition model and the real-world market situations. Market oligopoly is the most likely market situation in the real world, just as political oligopoly is the most likely political situation. The difference which affects the relative ac- ceptability of the two frameworks of analysis lies in the fact that the economic implications of market oligopoly have been developed and studied by leading economists of England and the United States, while the economic implications of political oligopoly have never been system- atically set forth. The development of precise definitions for, and of analysis of the economic implications of, political situations is essential to the future application of the price theory of public finance to real. world situations. The political polypoly model which does provide an optimum allo- cation of resources is important to economic analysis, even if it does not provide an explanation of the operation of the real-world political process or of the operation of the real-world allocation of resources to public goods. In a democratic representative society it is likely that the general principles of the optimum allocation of resources model can be applied to specific real-world allocation problems. In any case, there is no apparent reason why the tools of price theory 72  OTHER APPLICATIONS OF THE THEORY analysis would not provide insights into the allocation of resources to public goods in the real world. The political situation which exists will have to be taken into consideration, but this limitation is not sufficient reason for rejecting price theory tools of analysis. The hypothetical political situation defined as political polypoly and the optimum allocation of resources model do provide objective criteria for making policy proposals. However, there are many problems of applying the conditions of the hypothetical situation and of the model to real-world allocation problems. Whether or not these problems of application can he overcome cannot be known until attempts are made to interpret the concepts and arrive at specific proposals. In any case, it is likely that any proposals for sweeping changes in the operation of government would not be accepted in our society. Policy proposals by economists are called for by our society and by the governmental or- ganizations which represent society. Therefore, as particular situations arise, the economist can make proposals which will tend to make the operation of government come closer to political polypoly and the pro- duction of public goods come closer to the optimum allocation of re- sources if the theoretical concepts can be translated into reasonable pol- icy proposals. Political polypoly as a hypothetical set of constitutional rules is pri- marily the concern of the political scientist. However, the economist may very well be concerned with proposed changes in constitutional rules which affect the government's ability to interpret the demands of individuals for public goods. One example of such a change can here be considered for illustrative purposes. The state of Oklahoma has con- sidered several proposed changes in its constitution relating to repre- sentation in its legislative branch. A non-population basis for repre- sentation is likely to result in the favored group having a greater vote in the allocation of resources by the state. The economist has a respon- sibility to point out what effects the various proposals might have upon the allocation of resources. The optimum allocation of resources model and policy rules which determine the role of government in the production of public goods are more directly the concern of the economist. This fact does not imply that the economist should propose a policy rule that will make the opti- mum allocation of resources the role of government in the production of public goods. Such a policy rule would probably not be accepted by our society. Other considerations must he taken into account. These other considerations, however, do not prevent the economist from evalu- 73 OTHER APPLICATIONS OF THE THEORY analysis would not provide insights into the allocation of resources to public goods in the real world. The political situation which exists will have to be taken into consideration, but this limitation is not sufficient reason for rejecting price theory tools of analysis. The hypothetical political situation defined as political polypoly and the optimum allocation of resources model do provide objective criteria for making policy proposals. However, there are many problems of applying the conditions of the hypothetical situation and of the model to real-world allocation problems. Whether or not these problems of application can be overcome cannot be known until attempts are made to interpret the concepts and arrive at specific proposals. In any case, it is likely that any proposals for sweeping changes in the operation of government would not be accepted in our society. Policy proposals by economists are called for by our society and by the governmental or- ganizations which represent society. Therefore, as particular situations arise, the economist can make proposals which will tend to make the operation of government come closer to political polypoly and the pro- duction of public goods come closer to the optimum allocation of re- sources if the theoretical concepts can be translated into reasonable pol- icy proposals. Political polypoly as a hypothetical set of constitutional rules is pri- marily the concern of the political scientist. However, the economist may very well be concerned with proposed changes in constitutional rules which affect the government's ability to interpret the demands of individuals for public goods. One example of such a change can here be considered for illustrative purposes. The state of Oklahoma has con- sidered several proposed changes in its constitution relating to repre- sentation in its legislative branch. A non-population basis for repre- sentation is likely to result in the favored group having a greater vote in the allocation of resources by the state. The economist has a respon- sibility to point out what effects the various proposals might have upon the allocation of resources. The optimum allocation of resources model and policy rules which determine the role of government in the production of public goods are more directly the concern of the economist. This fact does not imply that the economist should propose a policy rule that will make the opti- mum allocation of resources the role of government in the production of public goods. Such a policy rule would probably not be accepted by our society. Other considerations must he taken into account. These other considerations, however, do not prevent the economist from evalu- 73 OTHER APPLICATIONS OF THE THEORY analysis would not provide insights into the allocation of resources to public goods in the real world. The political situation which exists will have to be taken into consideration, but this limitation is not sufficient reason for rejecting price theory tools of analysis. The hypothetical political situation defined as political polypoly and the optimum allocation of resources model do provide objective criteria for making policy proposals. However, there are many problems of applying the conditions of the hypothetical situation and of the model to real-world allocation problems. Whether or not these problems of application can he overcome cannot be known until attempts are made to interpret the concepts and arrive at specific proposals. In any case, it is likely that any proposals for sweeping changes in the operation of government would not be accepted in our society. Policy proposals by economists are called for by our society and by the governmental or- ganizations which represent society. Therefore, as particular situations arise, the economist can make proposals which will tend to make the operation of government come closer to political polypoly and the pro- duction of public goods come closer to the optimum allocation of re- sources if the theoretical concepts can be translated into reasonable pol- icy proposals. Political polypoly as a hypothetical set of constitutional rules is pri- marily the concern of the political scientist. However, the economist may very well be concerned with proposed changes in constitutional rules which affect the government's ability to interpret the demands of individuals for public goods. One example of such a change can here be considered for illustrative purposes. The state of Oklahoma has con- sidered several proposed changes in its constitution relating to repre- sentation in its legislative branch. A non-population basis for repre- sentation is likely to result in the favored group having a greater vote in the allocation of resources by the state. The economist has a respon- sibility to point out what effects the various proposals might have upon the allocation of resources. The optimum allocation of resources model and policy rules which determine the role of government in the production of public goods are more directly the concern of the economist. This fact does not imply that the economist should propose a policy rule that will make the opti- mum allocation of resources the role of government in the production of public goods. Such a policy rule would probably not be accepted by our society. Other considerations must be taken into account. These other considerations, however, do not prevent the economist from evalu-  THE PRICE THEORY OF VALUE IN PUBLIC FINANCE ating specific proposals in particular situations and stating whether or not the proposal will cause the allocation of resources to correspond more closely to the optimum allocation than the present allocation of resources. In other words, the optimum allocation of resources can serve as a standard of reference for policy proposals by economists. In many specific allocation problems it may be that the proposal based upon the optimum allocation of resources would be acceptable to our society. The problems of measurement and interpretation of the situa- tion in this case would be the primary stumbling blocks to the accept- ance of the proposals. In any case, the price theory of public finance provides the theoretical framework for objectively analyzing policy pro- posals. Whether or not the proposals would be accepted by our society with our existing political situation can only be answered when specific proposals are actually made. The area of most importance to the present application of the price theory of public finance is the discussion of concepts of public finance. Future applications of the theory to specific allocation problems ulti- mately depend upon whether or not economists think of public finance in terms of applying price theory concepts to public goods. If econo- mists discuss public finance concepts in terms of price theory concepts, the application of the theory to specific problems will more or less nat- urally follow. DeViti DeMarco's work is a classic example of what can be done in this area. The general principles of price theory analysis can be applied to existing concepts in public finance. The basic problem lies in the economists' existing views that the government acts in an arbitrary man- ner not related to the demands of society for public goods and that taxes are coercive payments. Taxes can be discussed as prices paid for the goods and services produced by the government. The govern- ment can be discussed as a producer of economic goods. It may be ne- essary to recognize the fact that the political process is likely to be more coercive than the market process in the allocation of resources. This limitation need not interfere with discussing the production of public goods in terms of the process being a transaction which has a payment side and a production side that are determined by supply and demand. Kafoglis' work in defining public goods in terms of the existence of external economies and diseconomies is another example of what can be done to apply price theory concepts to the discussion of concepts of public finance. It is conceivable to define public finance as the study of goods which have the characteristics of external economies or exter- THE PRICE THEORY OF VALUE IN PUBLIC FINANCE ating specific proposals in particular situations and stating whether or not the proposal will cause the allocation of resources to correspond more closely to the optimum allocation than the present allocation of resources. In other words, the optimum allocation of resources can serve as a standard of reference for policy proposals by economists. In many specific allocation problems it may be that the proposal based upon the optimum allocation of resources would be acceptable to our society. The problems of measurement and interpretation of the situa- tion in this case would be the primary stumbling blocks to the accept- ance of the proposals. In any case, the price theory of public finance provides the theoretical framework for objectively analyzing policy pro- posals. Whether or not the proposals would be accepted by our society with our existing political situation can only be answered when specific proposals are actually made. The area of most importance to the present application of the price theory of public finance is the discussion of concepts of public finance. Future applications of the theory to specific allocation problems ulti- mately depend upon whether or not economists think of public finance in terms of applying price theory concepts to public goods. If econo- mists discuss public finance concepts in terms of price theory concepts, the application of the theory to specific problems will more or less nat- urally follow. DeViti DeMarco's work is a classic example of what can be done in this area. The general principles of price theory analysis can be applied to existing concepts in public finance. The basic problem lies in the economists' existing views that the government acts in an arbitrary man- ner not related to the demands of society for public goods and that taxes are coercive payments. Taxes can be discussed as prices paid for the goods and services produced by the government. The govern- ment can be discussed as a producer of economic goods. It may be nec- essary to recognize the fact that the political process is likely to be more coercive than the market process in the allocation of resources. This limitation need not interfere with discussing the production of public goods in terms of the process being a transaction which has a payment side and a production side that are determined by supply and demand. Kafoglis' work in defining public goods in terms of the existence of external economies and diseconomies is another example of what can be done to apply price theory concepts to the discussion of concepts of public finance. It is conceivable to define public finance as the study of goods which have the characteristics of external economies or exter- 74 THE PRICE THEORY OF VALUE IN PUBLIC FINANCE ating specific proposals in particular situations and stating whether or not the proposal will cause the allocation of resources to correspond more closely to the optimum allocation than the present allocation of resources. In other words, the optimum allocation of resources can serve as a standard of reference for policy proposals by economists. In many specific allocation problems it may be that the proposal based upon the optimum allocation of resources would be acceptable to our society. The problems of measurement and interpretation of the situa- tion in this case would be the primary stumbling blocks to the accept- ance of the proposals. In any case, the price theory of public finance provides the theoretical framework for objectively analyzing policy pro- posals. Whether or not the proposals would be accepted by our society with our existing political situation can only be answered when specific proposals are actually made. The area of most importance to the present application of the price theory of public finance is the discussion of concepts of public finance. Future applications of the theory to specific allocation problems ulti- mately depend upon whether or not economists think of public finance in terms of applying price theory concepts to public goods. If econo- mists discuss public finance concepts in terms of price theory concepts, the application of the theory to specific problems will more or less nat- urally follow. DeViti DeMarco's work is a classic example of what can be done in this area. The general principles of price theory analysis can be applied to existing concepts in public finance. The basic problem lies in the economists' existing views that the government acts in an arbitrary man- ner not related to the demands of society for public goods and that taxes are coercive payments. Taxes can be discussed as prices paid for the goods and services produced by the government. The govern- ment can be discussed as a producer of economic goods. It may be nec- essary to recognize the fact that the political process is likely to be more coercive than the market process in the allocation of resources. This limitation need not interfere with discussing the production of public goods in terms of the process being a transaction which has a payment side and a production side that are determined by supply and demand. Kafoglis' work in defining public goods in terms of the existence of external economies and diseconomies is another example of what can be done to apply price theory concepts to the discussion of concepts of public finance. It is conceivable to define public finance as the study of goods which have the characteristics of external economies or exter- 74  nool disecononmies. Any good woith these chorocteristics is of poblic con- cern. It theoefore may he considered as a poblic good es if it is not presently produced by the governmeont. In any' case, it appears thaota great deol ore work con be done in the area of defining pobic goods ato the oharacteoistics of the goods. Notiosol defense con he disoosoed os a good soils the characteristic of jointness of conosumption. Thse olls- cationoofesoooces tonaonoldefense coohbedscussedin terms ofth sopply ond denmond foe oational defense. Thot tho osisting potitiool moeohniscnnot perecetlynseosoreethe demond oust ente thsedis- cossion, hot this need not precludo the discossion of national defense as o publio good. The nmain point to be maode is thaot the future developmsent ond op- pliootion of the voluntory oxohooge or pokce thooy of poblio finonoce depeod to a lore estent opon the applioation of the geoneoal poisciples of price theory analysis to existing conceps of public finance. If and senoecononostsdisussstoxesos poioes, thegosernmentoasoapodueo, the activities of goveonment 00 pohlic goods, end the ollocotion ofre hore y goernmenbosedoupon supplyoanddemaond, thepriio heory of puhlic finonce Hill he opplied to specific prohbltos of governmoent. nal diseooonomies. Any good wsith thoso charcteristics is of puhlic non- cern. It therefore maoy he considered as o public good even if it is not poesently produced hy the govornmoent. In any case, it appears thata great deol moroe worok can he done in the area of defining public goods as to the ohorooteristios of the goods. Notionol defense con he discuosed as a good wsith the characteristic of jointness of consumption. Thse allo. notion of resooeso to notionol defense con hediscussed in termsofthe sopply ond demond f00 notionol defense. Thot the exsting politiool mechanism connot perfectly measreethe demand must enterothe dis- cossien, hot this need not poeclode the discussion of notionol defense aso puhlic good. The momn point to he mode is shot the fotore developmeent ond op- plicotion of the volontooy exchooge sor poice theory of pohlic finone depend to o looge estont uon the opplicotion of the genoeoal poinciplem of poiee theooy onotysis to existing concepts of puhlic finonce. If ood wnheneconsomists discoss taxesoasprices, thegoernmentosoapodue, the octivities of goveonnment os pohlic goods, ond the ottocotion of oe- 0000000 hy governmenthoasedoupon sopplyoanddemaond, hepietheoy of pohlic finonce mill he opplied to specific prohlemo of goernment. nol diseconomsies. Any good mith th ese choaoacteoistics is of puhlic con- cern. It therefore may be considered osoa public good even if it is not poesently pooduced hy the goveonment. In any cose, it appearsthat great deol mooe work con he done in the aea of defining public goods os to the chooocteoistics of the goods. Notionol defense con he diseossed aso good wcith the characteristic of jointness of consomption. Theo ollo- notion of resouorces to notionol defense con hediscoosed in teomsofthe soppty ond demond foo notionol defense. Thot the esisting politico1 mechonism connotperfectly mesee theodemandmostoenterothe di- cossion, hot this noed not pooclode the discussion of notionol defense as o puhlic good. The mmn point to be mode is thot the fotooe developmeent ond op- plicotion of the voluntooy exchonge oo poise theory of pohlic finonce depend to o looge estent uon the opplicotion of the general poinciplem of poice theory analysis to existing conceptseof pohlic finonce. If ond swhenoeconomists discos eotsasepoices, the goenmentoasoopodce, the octivities of govnent os pohlic goods, ond the ollocotion of oe- s000000 by goernmenthoaseduon supplyoand demand,he pice theory of public finonce will he opplied to specific probhlems of government. 75 75 75  SELECTED BIBLIOGRAPHY BOOK ics. Ed. B. F. Haley. Homewood, Il Richard D. Irwtin, 1952. Arrowt, Kent J. Social Choice and Indiidual Vtthues. Newt York: John Wilt0 and Sons, 1951. flit Co., 1961. Bentthatm, Jeremy. The Theory of Legislation. Ed. C. K. Ogdtt. Nett York: H6r- Boulding, Kennetth C. Princtiples 4f Economtic Polic. Englewootd Cliffs, N. J.: Prent. tict-Hall, 1958. Bwen, Howard R. TwadSocil Ecoy.N ewtY ork: Rinethart and C., 1941. .Public Priniples of Public Dtbt. Hmewod: Richard D. Irwtit, 1951. Untiverity of Michigtat Prest, 1962. Untiverstity Press, 1955. York: Htrper tttd Btrtthers, 1993. DeViti DeMarco, Atontio. Fittt Principles of Pulic Finance. Tratn. Edith Perin Margt. 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