The Intrinsic Social Cost of Public Goods: Revising (downward) the Optimal Size of Government
Abstract: The literature on the optimal provision of public goods has neglected an important intrinsic social problem associated with public goods. Specifically, because public goods characterize a large part of the gains to many varieties of relationship (marriages, nation-states, firms, etc.), those public-good gains introduce a fundamental obstacle to efficient transacting. This limit on transacting deriving from public goods has been found to induce excess (Kaldor-Hicks inefficient) divorces after the American shift from fault to no-fault, thus identifying an essential normative limitation of no-fault regimes that was previously unappreciated. Because public goods play this important role in precipitating inefficient dissolutions of all kinds, this suggests that analysis of the efficient quantity of public-good provision should incorporate this novel issue. Hence, this paper presents a revised analysis of the standard public-good problem in which the social cost of public-good-induced inefficient dissolutions is incorporated. This analysis shows that the socially optimal quantity of public-good provision is reduced once this potential for inefficient dissolution is taken into account.
