2.6 Community based initiatives
The answer to a simple question: “who should provide public goods?” has not yet received a satisfactory answer (Itaya, de Meza and Myles 2000). National Parks in the US are supported by voluntary contributions but in New Zealand they are almost entirely financed by government. The early literature assumed consumer utility was derived solely from the total quantity of the public good and that there is no benefit per se from the level of individual contribution. The idea of “warm-glow preferences” grew out of the idea that a contribution to the public good (eg, species preservation) generates utility over and above the additional level of the public good. Thus consumers are seen to derive utility directly from the act of charity. A further and related refinement looks at the extent to which consumers take into account the implications of their choices on government revenue and spending decisions. Labelled “see through”, this assumption recognises the ability of consumers to anticipate a significant reaction from government. Consumer see-through in the case of a donation to a national trust to preserve species would differ according to whether the trust operated at a national or local level. One would expect see-through to be greater at lower levels. The action of a single individual would probably have little impact at the national level. Even with these refinements to models of public goods it is not possible to generalise on the optimal mix of government to private contribution to a public good. Much depends on whether private contributions and government expenditure are equally efficient in generating public goods.
The provision of environmental services outside the government sector can be analysed using a model developed by Weisbrod (1975). Using a three-sector model he identified factors determining what goods will be provided by government, by private (for-profit) markets and by voluntary (non-profit) markets. Weisbrod allows any tax (or user charge) system provided the system does not permit every consumer to equate their tax liability with his or her individual marginal benefit. This effectively excludes the possibility of a Lindahl equilibrium. The assumption also excludes vote trading, bribes or log rolling if the effect was to leave each person with a net tax price equal to their evaluation of the marginal output.
Government is assumed to supply a quantity X as determined by the demands of the median voter. Therefore, if consumer-voters know the rule by which government will allocate costs among them, their utility functions will generate a set of demand functions for government provided goods. The inability of government to tax/charge individuals at their marginal valuation is vital to Weisbrod's model because it means that some voters will receive marginal benefits from the collective-consumption good that exceed marginal tax, others will receive marginal benefits that are less than the marginal tax. To simplify the exposition, Weisbrod assumes: 1) there are 7 voters, each with a different demand Di for water quality (X); 2) the tax-finance rule specifies that costs are borne equally which implies that the marginal cost of supply is a constant; and 3) each voter pays the tax paid by the median voter, who has demand D4. To simplify the illustration let us assume that demand by voters 5 through 7 is such that D7 > D6 > D5 and demand by voters 4 through 1 is D4 > D3 > D2 > D1 over all X.
Figure 7 shows each person paying $P per unit of output. The majority (persons 4-7) prefer to improve water quality (WQ) to X*. A minority (persons 1-3) prefer to reduce the tax and would prefer a lower level of WQ. In contrast, persons 5-7 would prefer to increase tax and a higher level of WQ. Assuming a majority voting rule, person 4, the median voter, rules the day. Notice that the intensities of dissatisfaction vary. For example, person 7's dissatisfaction with X* is given by ABC and person 3's dissatisfaction is measured by PAX*FH.
If the supply of WQ is institutionally constrained to be either public or private sector, choice might well be sub-optimal because of an adjustment to the non-optimal level of provision of the public good by government. Individuals are left in non-optimal positions in both private and government markets. For example, X might describe water quality at a local beach. If supply is determined by the median voter then X* will prevail. Weisbrod suggests that dissatisfied members of the community can take a number of actions.
They can migrate to another government jurisdiction in which the output and tax pricing system improves their economic welfare. This follows the Tiebout (1956) hypothesis. Therefore, some over satisfied and under satisfied consumers may choose to vote with their feet. Those who are willing to pay for more of X may lobby to form lower levels of government. Dissatisfied community members can look to other means of WQ.
The homogeneity of the voters within the political system is an important determinant of the relative number of people desiring change. The more homogeneous the voting group – in terms of tastes, incomes, wealth, etc – the smaller will be the expected variation in individual demands and therefore, the smaller the likely degree of dissatisfaction with the level of X.
Contract failure offers some insights into why non-profit organisations are common in the provision of public goods. We use lake management as an example. Recall that a public good has two attributes. First, the marginal cost of additional consumption is zero, once the good has been provided. Therefore, if a non-profit organisation improves water quality by an additional unit then, in the absence of congestion, an additional visitor to a lake can derive utility from this improvement at no added cost to the organisation. Second, for reasons of economic efficiency each individual should contribute his or her marginal valuation. But there is no incentive for the individual to do this because the amount contributed is so small relative to the total that the person's non-subscription would have little impact on total supply. The individual can free ride which suggests that the private market is an inefficient means of providing the goods and services.
Why could we not expect the use of for-profit organisations in lake management? A for-profit organisation would have an incentive to get as much money as possible and distribute this to its owners. However, with a non-profit the supplier of money is assured that the money will in fact be used for the service and not for profit dispersement. The problem relates to the indivisible nature of the service involved. Assume that we are dealing with water quality. There is no obvious connection between a dollar contributed and water quality. But, this being so, the contributor can be assured that the dollar contributed will in fact be used for water quality improvement. If the individual could ascertain the incremental amount of water quality provided by the contribution then there is no a priori reason why non-profit should be preferred over for-profit organisational form. Free-rider refers to the lack of incentive to contribute to the cost of the public good. Whereas contract failure refers to the inability to control the use of monies obtained from contributions.
Hansmann (1980) argues that non-profit organisations are a response to contract failure. Another interesting issue becomes apparent when we follow this line of reasoning further. Each individual could set up a contract with the organisation to prevent profit dispersement, which places the costs of contracting and policing on the individual. With a non-profit organisation, the state and members of the community can take action if management compensates itself too generously. In this light, the non-profit is a means of economising on the transactions costs of contracting and enforcement. Transaction costs are minimised by putting them under one umbrella organisational form. The contract is determined by the state's corporate law and policed by the state. Therefore, rather than requiring each organisation to set its own rules, the state is able to set the broad parameters under legislation thereby economising on transaction costs.
2.6.1 Other initiatives
Initiatives undertaken by firms and groups are important for diffusing improved environmental practices. Increased attention by firms to their environmental and social performance often reflects market pressure and many are beginning to incorporate triple bottom line reporting.
Corporate codes of conducts are within firm initiatives for sensitising employees, suppliers and contractors to management’s expectations concerning environmental and social performance of the enterprise.
Negotiated agreements involve voluntary adherence to a public program or a negotiated commitment for specific improvements. Agreements are typically self-monitoring and non-binding which may lead to concern. Negotiated agreements often suffer from weak controls, free riding, high transaction costs and regulatory capture (OECD, 2001). However these agreements may contribute to raising awareness and disseminating information.
Voluntary agreements can play a role in improving environmental quality. Economists have traditionally taken a sceptical attitude to the idea that persuading people to change their behaviour can correct externalities. The standard objection is that individuals with stable preferences will change behaviour only if incentives change. If environmental quality is in the nature of a public good then the incentive to protect and improve environmental quality on a voluntary basis is dilute. However people do volunteer, re-cycle and join in to clear the litter of others. Of course, preferences can and do change as individuals receive information but the incentive problem remains. Even if consumers are aware of global warming is this sufficient to get them to switch to alternative modes of transport?
Information programs can play a role to increase awareness and action by consumers to reduce the environmental impact of their consumption patterns. These initiatives may include eco-labelling and certification schemes.
