How Ethics May Influence
the Provision of Public Goods
Michael Pickhardt
How Ethics May Influence the Provision of Public Goods
by
∗
Michael Pickhardt
1
Introduction
Should ethics play a role in economics, and if so, what kind of role should be assigned to
ethics in economics? Questions of this sort have troubled the minds of economists ever since
modern economics was established by Adam Smith (1776). For some reason Smith himself
treated the two issues separately, ethics in his Moral Sentiments (1759), economics in his
Wealth of Nations (1776), and classical British economists followed his lead. Today,
mainstream neoclassical economics still rests on the same fundamental reasoning (Simon
1987), which Wilber (2004, p. 427) has recently summarized with the following propositions:
1
“Human nature is such that humans are (a) self-interested and (b) rational. That
is, they know their own interest and choose from among a variety of means in
order to maximize that interest.
2
The purpose of human life is for individuals to pursue happiness as they
themselves define it. Therefore, it is essential that they be left free to do so.
3
The ideal social world is a gathering of free individuals who compete with each
other under conditions of scarcity to achieve self-interested ends. As in the
natural world with physical entities, in the social world too there are forces at
work which move economic agents toward equilibrium positions.”
∗
Contact: PD Dr Michael Pickhardt, Chemnitz University of Technology, Department of Economics, Thüringer
Weg 7, 09126 Chemnitz, Germany. Phone: 0049-371-531-34943, Fax: 0049-371-531-26439.
Email: [email protected]
2
This liberal view of the world, or in the context of this paper the ethics of the free market,
were challenged in various ways during the last two centuries. Among the first critics were
the followers of the German Historical Schools. Although leaders of the Historical Schools, in
particular Gustav von Schmoller (1900, 1904), did not deny that humans are predominantly
self-interested, they argued that economic activities of individuals may not be motivated by
their self-interest alone. Motivational forces such as Gemeinsinn (i.e., a ‘sense of community’
or ‘public spirit’), morals, culture and customs would also play a role. Gemeinsinn, in this
context, “essentially means that the individual also cares for the well being of the group that
he or she is associated with, even if this would otherwise harm his self-interest and lead to an
individual loss” (Pickhardt 2005b, p. 277). The dispute between followers of the Historical
Schools, who argued in favor of a role for ethics in economics and those who advocated a
value-free science cumulated in the so-called Werturteilsstreit (struggle over value
judgments) in 1914 (e.g. Shionoya 2001, pp. 13–14). A more recent branch of criticism is
concerned with the notion of rational individuals and argues that because of limited cognitive
abilities humans act in a boundedly rational manner, rather than in a purely rational one (e.g.
see Selten 2001; Kahneman 2003). Criticism of the kind mentioned so far may be summarized
under the label Behavioral Economics, interpreted in a broad sense (Simon 1987). The
common element being that the actual behavior of humans is not, or just partly, compatible
with proposition 1.
Yet even if proposition 1 is accepted and, in addition, individuals are indeed left free to do
what they want provided that it is legal (proposition 2), there may be circumstances under
which the equilibrium that is reached does not represent a maximum of each individual’s
interest. Cases of market failure, in particular public goods, may fall into this category.
Moreover, there is an alternative and fairly recent approach that accepts all three propositions
but argues that a moral or behavioral order is needed to ensure the smooth functioning of the
3
process describe by the three propositions. For example, Buchanan (1999, p. 210) advocates a
moral order in which “persons are recognized to be units of the human species and to exist as
potential reciprocating partners in mutually beneficial interactions, in exchanges, broadly
defined”. In this context it is worth noting that Evensky (1993, p. 197) has stressed that a
comprehensive reading of Adam Smith’s two works, in particular his 1789 revision of the
Moral Sentiments, reveals that in Smith’s view the ‘invisible hand’ “must not only coordinate
individuals’ choices, it must shape the individuals into constructive social beings – ethical
beings”. In other words, the envisaged benefits would follow from the process described by
the three propositions only if individuals adhere to a common social ethics.
Hence, in a broad sense, there are at least two categories of criticism regarding
mainstream value-free neoclassical economics. The first argues that the assumptions about
human nature do not hold, and the second argues that even if the assumptions about human
nature hold, the expected consequences do not necessarily follow. As this paper is devoted to
the role ethics may play in the provision of public goods, it is concerned with both categories.
In particular, the purpose of this paper is to give some further insights regarding problems and
benefits that may emerge when ethics play a role in the provision of public goods (see also
Pickhardt 2006b). The paper proceeds as follows. The next section provides some background
concerning the notions of ‘public goods’ and ‘ethics’. In section three a few examples where
ethics may play a role in the provision of public goods will be discussed. Section four
concludes.
2
Background
This section reviews a few essentials concerning public goods and ethics that are relevant for
this paper. More comprehensive treatments of the issues can be found in the literature
referenced below.
4
2.1
Public Goods
Surveys on public goods literature show that there are various different, sometimes even
mutually exclusive, ways of defining public goods (e.g., Blümel et al. 1986; Pickhardt 2003,
pp. 61–135; Pickhardt 2006b, pp. 229–232). For the purpose of this paper, however, it
suffices to concentrate on just a few popular definitions. These are: (i) nonrivalness in
consumption, (ii) non-application of the price-exclusion principle, (iii) provision of goods and
services by a political institution.
2.1.1 Nonrivalness in Consumption
Nonrivalness in consumption means that a given quantity of a good or service can be
consumed simultaneously by two or more individuals as indicated in equation (1).
X = x1 = x2 = … = xn ,
(1)
where X represents the total quantity of the good or service that is provided and x1, x2, …, xn
are the quantities consumed by the individuals 1, 2, …, n, respectively, and the equal signs
indicate the simultaneity of the individual consumption acts. If this equation is used in a
conventional neoclassical equilibrium model the following condition for the Pareto-optimal
provision of public goods emerges (e.g. Varian 1996, p. 612):
n
∑i=1
MRSi = MRT ,
(2)
where MRSi refers to the i-th individual’s marginal rate of substitution between the public
good X and a private good, chosen as numeraire, and MRT is the marginal rate of
transformation between these two goods. Paul A. Samuelson (1954) developed the formal
definition of nonrivalness in consumption or jointness in demand expressed in (1) and derived
the optimality condition (2), which is therefore also known as the Samuelson condition.
Pickhardt (2006a) offers a review of Samuelson’s 1954 paper and its legacy.
5
In contrast, private goods are characterized by rivalness in consumption. That is, a given
quantity of a good or service must be divided up among those who wish to consume it at the
same point in time as indicated in equation (3).
Y = y1 + y2 + … + yn ,
(3)
where Y represents the total quantity of the good or service that is consumed and y1, y2, …, yn
are the quantities consumed by the individuals 1, 2, …, n, respectively, and the plus signs now
indicate the rivalry of the individual consumption acts. The condition for the optimal
provision of private goods is:
MRS1 = MRS2 = … = MRSn = MRT ,
(4)
where MRSi refers to the i-th individual’s marginal rate of substitution between the private
good Y and a private good, chosen as numeraire, and MRT is the marginal rate of
transformation between these two goods.
In a partial setting, the MRT can be interpreted as the marginal costs of providing the
good under consideration and the MRSi can be interpreted as the reservation price the i-th
individual is willing to pay. Also, in a price-quantity diagram, the optimality condition (2)
calls for a vertical aggregation of individual demand curves, i.e., over individual prices,
whereas the optimality condition (4) requires a horizontal aggregation, i.e., over individual
quantities (e.g. Rosen 1992, pp. 69–75). This was first demonstrated by Bowen (1943). But
the Lindahl (1919) model rests on the same principle and Samuelson (1955, p. 353–354)
shows that both the Bowen model and the Lindahl model are just special cases of
Samuelson’s 1954 general model (see also Batina and Ihori 2005, pp. 13–14).
Hence, regarding public goods, the optimality condition (2) requires that all n consumers
reveal their reservation prices. But given the fact that according to (1) they would all consume
the same quantity of the public good the essential question is why they should reveal their
individual reservation prices.
6
2.1.2 Non-Application of the Price-Exclusion Principle
Richard A. Musgrave (1959) introduced the price-exclusion criterion into modern public
goods theory. If the price-exclusion principle is not applied the general public, or certain parts
of it, may have free access to the good or service. But there are a number of different reasons
why the price-exclusion principle may not be applied. These reasons could be of a technical
nature, for example, an exclusion technique may not be available. But they could also be of an
economic nature. For example, transaction costs of applying a price-exclusion technology
may be too high relative to the revenue that could be generated. In addition, price-exclusion
could be economically undesirable. In cases where an additional consumer causes no
additional costs the efficiency condition “price equals marginal costs” requires a price of zero,
and therefore the price-exclusion principle should not be applied (e.g. see Pickhardt 2003, pp.
126–132). Moreover, there could be political or ethical reasons for not applying the priceexclusion principle. A few such cases will be discussed in section three. However,
independent from the reason for not applying the price-exclusion principle, in each case the
consumers of the goods and services do not contribute to their financing and, therefore, others
must step in and cover the provision costs, if the latter are positive. Here the essential question
then is why these ‘others’ should do that.
2.1.3 Provision of Goods and Services by a Political Institution
Goods and services may be considered public just because they are provided by a political or
public institution such as the state or a local municipality. For example, Buchanan (1968, p. 1)
writes: “People are observed to demand and to supply certain goods and services through
market institutions. They are observed to demand and to supply other goods and services
through political institutions. The first are called private goods; the second are called public
goods”. Definitions of this kind focus on the institutional choice individuals may have with
7
respect to the provision of goods and services. The essential question then is why they choose
providing goods and services by a political institution.
Moreover, given that the goods and services under consideration are provided by a
political institution, this definition may encompass goods and services consumed in a nonrival and a rival manner as well as goods and services for which the price-exclusion principle
is applied or not (see Table 1). Likewise, goods that are consumed in a nonrival manner
and/or for which the price-exclusion principle is not applied, such as the sunlight, may not be
considered as public goods because they are not provided by a political institution. Finally,
note that both this and the preceding definition are entirely supply side orientated. In contrast,
the first definition focuses exclusively on a demand side aspect, that is, the nonrival
consumption of a good or service.
Table 1: Definitions of Public Goods
(A) Nonrivalness
in Consumption
(B) Non-Application of the (C) Provision by a Political Institution
Price-Exclusion Principle
(D) = A + B
(E) = B + C
(F) = A + C
(G) = A + B + C
2.2
Ethics
Broadly defined, the term ethics refers in one way or another to a set of behavioral principles
or moral ideals and values governing the right conduct of an individual as a member of a
group. To this extent, ethics deal with the relationship between the individual and the group
and help the individual to distinguish right and wrong, good and evil from a group
8
perspective. If an individual member shows behavior patterns that are considered unethical by
the group this member may face sanctions. For this reason ethics could be considered as a set
of unwritten or informal laws that constitute a specific group and govern the actions of its
members. Moreover, as there can be many different groups, there can be as many different
ethics and some may overlap or are mutually exclusive. Examples include the ethics of the
large religions, of different professions such as medicine and military and of certain activities
(e.g. see Buchanan 1994) and so on. Yet some ethics may be shared by all humans.
Moreover, there are a number of different ethical theories. This paper, however, is
basically confined to normative and applied ethics. Applied ethics is concerned with the
analysis of specific moral issues that are fairly controversial (e.g. see Winkler (1998), for an
overview). Normative ethics can be distinguished into three competing types (e.g. see Wilber
2004, p. 428): (i) virtue theories, (ii) duty or deontological theories, and (iii) consequentialist
theories.
2.2.1 Types of Normative Ethics
Virtue theories are rooted in ancient Greek moral philosophy and focus on judgments of
agents or character (e.g. see Louden 1998). In particular, virtue theories advocate acquiring
virtues such as courage, justice, temperance and wisdom, the so-called cardinal virtues, and
charity, faith and hope, the so-called theological virtues, through moral education. Adopting
bad character traits or vices such as cowardice, injustice, insensibility, vanity, etc. should be
avoided. Then, if agents adhere to these virtues, ethically acceptable actions and consequences
should follow.
Duty or deontological theories focus on judgments of actions, that is, on doing the right
thing irrespective of the consequences that might follow (e.g. see Hallgrath 1998). Therefore,
duty theories are also called non-consequentialist theories. But there are various duty theories
and some have been developed by philosophers such as Pufendorf, Kant, and Ross. Kant’s
9
duty theory, for example, is based on a single principle of duty, the categorical imperative,
which simply mandates an action irrespective of the actor’s personal desires. ‘Treat people as
an end, and never as a means to an end’, is an example of a categorical imperative.
Consequentialist theories focus on judgments of consequences of actions and are also
known as teleological theories because they focus on the end result of an action (e.g. see
Hallgrath 1998). Only if the good consequences outweigh the bad consequences of an action
the latter is considered ethically proper. However, depending on who is affected by the
consequences of an action, three subdivisions of consequentialist theories can be
distinguished: (i) ethical egoism, that is, only the consequences to the agent performing the
action matter, (ii) ethical altruism, that is, only the consequences to everyone except the agent
performing the action matter and, (iii) utilitarianism, that is, the consequences to everyone
including the agent performing the action matter. The most prominent consequentialist
theories are those of the utilitarian type. They go back to 18th and 19th century writers such as
Jeremy Bentham and John Stuart Mill (Hallgrath 1998, pp. 613–614; Scarre 1998).1 But
again, various subtypes of utilitarianism can be distinguished. Two examples are actutilitarianism (Bentham) and rule-utilitarianism (Mill). The maxim of act-utilitarianism is:
‘act always in such a way as to promote the greatest happiness to the greatest number’
(Wilber 2004, p. 431). Note, however, that according to act-utilitarianism even an act of
torture could be morally acceptable if the social benefits of this act (e.g. prevention of future
terrorist attacks) outweigh the bad consequences (pain of the tortured individual,
imprisonment of the agent performing the act of torture, etc.). In contrast, rule-utilitarianism
focuses on behavioral norms or rules. Such a norm or rule is ethically acceptable if the
positive consequences of adhering to the rule outweigh the negative ones for everyone. Note
that this latter condition constitutes a fundamental difference with the duty theories mentioned
above. Also, Harsanyi (1998, p. 291) argues that rule-utilitarianism leads to a much higher
1
For a review of Bentham’s and Mill’s writings on public finance and the provision of goods and services by the
government see Dome (2004).
10
level of social utility than act-utilitarianism. For a modern treatment of utilitarianism and
economics see Yeager (2001).
Finally, it should be emphasized again that apart from the normative theories mentioned
so far there are various alternative ethical theories. Feminist ethics are just one example
(Wilber 2004, pp. 431–432).
3
How Ethics May Have an Impact on Providing Public Goods
The few remarks on public goods and ethics in the preceding section have demonstrated that
both issues can be treated in rather different and even mutually exclusive ways. This
notwithstanding, the present section aims at offering some insights with respect to the
provision of public goods when ethics play a role and, therefore, deals with applied ethics.
But because of the scope of the topic, the section is confined to just three important but
different impact channels and for each channel only one case will be discussed in some detail.
These three impact channels are: (i) behavioral norms, (ii) access to essential goods and
services, and (iii) limits of consumer sovereignty.
3.1
Behavioral Norms
Behavioral norms focus on actions and therefore fall predominantly into the realm of the duty
theories mentioned above. But, as noted, they also play a role in rule-utilitarianism. One such
behavioral norm is veracity, i.e. truth-telling or honesty. Khalil (2004, p. 115), for example,
defines honesty as “telling the truth and fulfilling contractual obligation even when the benefit
from cheating exceeds possible punishment”. Thus, Khalil’s definition considers honesty to
be duty.
11
3.1.1 The Veracity Norm: Some Theoretical Reflections
Honesty H, as defined by Khalil (2004), could be incorporated into an individual utility
function Ui as a separate argument:
Ui (yi, X, H) ,
(5)
where yi and X represent the i-th individual’s consumption of the private and the public good,
respectively, and utility depends positively on both arguments. The variable H could be
modeled as a 0 and 1 type, where 0 indicates lying and 1 truth-telling and
Ui (yi, X, H=1) > Ui (yi, X, H=0) ,
(6)
holds for all allocations of yi and X, including those where yi|H=1 < yi|H=0 and X|H=1 < X|H=0.
Now assume that a society consist of n individuals which all consider truth-telling as their
duty and which all place a positive value on the public good, that is, MRSi > 0 for all i.
This setting has an important implication for the provision of goods that are public
because they are consumed in a nonrival manner. If each individual reveals its true
willingness to pay for each conceivable amount of the public good under consideration, a
bargaining process will lead to a Pareto-optimal provision of the public good. Lindahl (1919)
first demonstrated this in a partial setting with two individuals (Musgrave 1939, p. 216). Note
that although each individual adheres to the honesty norm, the process is otherwise perfectly
voluntary and each individual acts in a selfish and rational manner (Pickhardt 2005b, pp. 281–
283). It is for the former reason that Musgrave (1939) has summarized this and similar
approaches under the heading “voluntary exchange theory of public economy”.
The dissatisfaction with the fundamental meaning of the Lindahl model, however, was
one of the reasons that motivated Paul A. Samuelson to write out his 1954 version of public
goods theory (see Pickhardt 2006a for additional motivations). In this context, the essential
difference with the Lindahl model is that Samuelson (1954) implicitly assumes that in (5),
∂Ui/∂H = 0 holds for all n individuals. In other words, Samuelson (1954) implicitly assumes
12
that individuals are neutral with respect to the honesty norm. Under these circumstances, and
provided that all n-1 individuals honestly reveal their true preferences, the remaining
individual could make a profit if it lies and pretends to have no interest in the public good. In
fact, any society of n individuals of the Samuelson-type is faced with a prisoner dilemma in
which lying is the dominant strategy for all n individuals. But if all n individuals lie the public
good could not be provided in a voluntary manner and the society of n individuals is worse off
(e.g. see Pickhardt 2003, pp. 31–35; Varian 1996, p. 611). Mainstream neoclassical public
goods theory therefore maintains that the government should step in and use its power to tax
to raise the necessary means for providing the public good.
Hence, theoretically the difference between the voluntary exchange theory and modern
public goods theory rests on different assumptions concerning the ethical foundation of
individual behavior (see also Sen 1982, pp. 94–97). But it is an empirical question which
assumption actually reflects the behavior of real humans.
3.1.2 The Veracity Norm in an Experimental Setting
In fact, over the last two to three decades researchers in the field of experimental economics
have accumulated a considerable amount of empirical evidence on the behavior of real human
beings from laboratory experiments with public goods. For example, according to Ledyard
(1995, p. 173) casual observation suggests that many subject pools consist of three different
types of individuals: (a) those who are always prepared to lie and, therefore, free ride if that
promises higher benefits than truth-telling or contributing (i.e. Samuelson-type individuals or
pure Nash players), (b) those who sometimes free ride and sometimes contribute to the public
good, and (c) those who always contribute to the public good. Often the relative shares of
these subgroups are in the range of 50, 40 and 10 percent, respectively (Ledyard 1995, p.
173). Pickhardt (2005a, p. 149) supports these findings for a classroom experiment with
public goods where in the first five rounds 38 subjects (56 percent) almost always showed a
13
free riding behavior, 25 subjects (37 percent) showed a mixed behavior and 5 subjects (7
percent) showed a cooperative behavior and contributed almost always.
The behavior of this latter sub-group, the c-type individuals, is compatible with the
behavior of individuals that regard truth-telling as their duty. Although they may incur an
individual loss in terms of their own payoffs, they continue to contribute to the public good in
all rounds, that is, they contribute irrespectively of the consequences. But what follows from
this frequently observed group composition for the provision of public goods? The answer to
this question is clear cut:
Any group of individuals that contains a non-empty set of duty motivated truth-telling
individuals can provide itself with public goods.
To be sure, (i) ‘itself’ here means that no external force such as the government with its power
to tax is needed and that the provision is, therefore, ‘voluntarily’ subject to the ethical duty (or
internal force), (ii) ‘public goods’ refers to goods consumed in a nonrival manner, and (iii)
public good provision is bound to be sub-optimal, if the group consists of both duty motivated
truth-tellers and others.
Moreover, truthful revealing of the willingness to contribute to a public good may also be
motivated by a variety of reasons that are not compatible with duty theories. Such motives are
discussed in some detail in Pickhardt (2005a, pp. 148–155) and the literature referenced there.
Regarding the purpose of this paper, selfish motives are of particular interest. Any selfish
motivation to contribute to a public good rests in one way or another on the assumption that
the individual’s own act of contributing makes it better off in the long run, because its own act
of contributing helps establishing and maintaining an environment that induces others to
contribute as well. In other words, selfishly motivated individuals contribute subject to the
implicit condition that a sufficient number of other individuals will join them sooner or later.
14
Therefore, broadly defined selfishly motivated truth-telling, which could be labeled long-term
or enlightened self-interest, complies with rule-utilitarianism. In fact, there is experimental
evidence that establishing such a contribution environment is possible and that maintaining it
over time requires 100 percent cooperation from all group members (Pickhardt 2005a, p.
150). Thus, the interaction of selfishly motivated truth-telling and duty motivated truth-telling
may well lead to a stable voluntary contribution environment that allows for the Paretooptimal provision of public goods.
How this process may work can be clarified with the following model, which is based on
Pickhardt (2005a). Assume a group of 5 individuals of which each faces the following linear
payoff function:
Ui =5 yi + 2X
(7)
where Ui denotes the payoff of the i-th individual, yi represents the quantity of the private
good and X is the quantity of the public good. Further, each individual has an endowment of
two resource units per period and, for simplicity, it may use both units either exclusively for
the private or the public good in order to maximize utility. Table 2 shows the set of feasible
allocations under the given circumstances.
Table 2:
Set of Feasible Allocations
Allocation
Private
Public
Overall Payoff
1
5 * 10
-
50
2
4* 14
1*4
60
3
3* 18
2*8
70
4
2 * 22
3 * 12
80
5
1 * 26
4 * 16
90
6
-
5 * 20
100
15
For example, if four individuals use their resources for the private good and one individual
uses its resources for the public good, allocation 2 results. Hence, according to (7), each of the
four individuals has a payoff of (5*2 + 2*2 =) 14, whereas the one individual who has used its
resources for the public good has a payoff of (5*0 + 2*2 =) 4, so that the overall payoff is
(4*14 + 1*4 =) 60. Inspection of Table 2 also reveals that if any of the allocations 1, 2 or 3
prevails, at least one other allocation can be offered that makes one or more individuals better
off without making any other individual worse off. Yet, if any of the allocations 4, 5 or 6
prevails, no such offer can be made. Hence, allocations 4, 5 and 6 are Pareto-optimal, while
allocations 1, 2 and 3 are not.
Now assume that the group of five individuals can have some conversation and, as a
consequence, they all agree to contribute their entire resources to the public good because this
would maximize overall payoff as well as individual payoffs subject to a unanimously
acceptable payoff distribution. Yet, since the agreement is not enforceable, regarding possible
outcomes the following alternative scenarios can be distinguished:
Scenario 1: If all five individuals are a-type players who are always prepared to lie and,
therefore, free ride if that promises higher benefits than contributing and if they assume that
their own behavior has no influence on the behavior of others (Nash-assumption), then
allocation 1 emerges. This is the classical prisoner dilemma result.
Scenario 2: If all five individuals are c-type players, say duty motivated truth-tellers, the
Lindahl result discussed in the previous subsection would emerge, that is, allocation 6, where
each individual adheres to the agreement and, therefore, fully contributes its entire resources
to the public good.
Scenario 3: If the group of five individuals is mixed in the sense that it consists of both aand c-type individuals, depending on the exact proportions, allocations 2 to 5 would emerge.
Yet, as in the previous two scenarios, each allocation depends solely on the sub-group
proportions and no dynamic interaction between the two sub-groups is conceivable.
16
Scenario 4: Now assume again that the group of five individuals is mixed and consists of
at least one duty motivated truth-teller, while all others are selfishly motivated truth-tellers.
Further, in contrast to scenarios 1 and 3, the latter now assume that other selfishly motivated
truth-tellers mimic their own behavior and contribute to the public good: (i) if contributing
makes them better off in the long-run, and (ii) on the condition that a critical number of other
group members contribute as well. Depending on individual attitudes towards risk taking this
critical number for the individual willingness to contribute (IWC) may vary in our example
from 0 to 2.
For simplicity, assume that all four selfishly motivated truth-tellers start contributing if a
critical number of at least one group member is contributing as well (IWC = 1). Then, in the
first round, only the duty motivated truth teller would contribute, because for the four
selfishly motivated truth-tellers condition (ii) is not fulfilled. Hence, allocation 2 emerges in
the first round. Yet, as of the second round, all four selfishly motivated truth-tellers would
join in because condition (ii) now holds. Therefore, allocation 6 emerges in the second round
and prevails as a stable equilibrium in all following rounds. This is because the long-run
payoff of the selfishly motivated contributors (i.e. 20) is higher than what they would get if
cooperation breaks down and allocation 2 re-emerges (i.e. 14). Further, allocation 6 is bound
to be stable over time since they all assume that other selfishly motivated truth-tellers mimic
their own behavior and thus would deviate from contributing, if they themselves deviate. But
again, depending on individual attitudes towards risk taking and/or envy, individual
willingness to deviate (IWD) may depend on a critical number of others who deviate as well.
In our example, the IWD critical values may be 1 or 2. For example, if all four have an IWD
of 1, co-operation would break down if one individual deviates from contributing.
In fact, it can be shown that for IWC = IWD = 1, allocation 6 would emerge in the longrun. Although deviation from contribution would be rewarding for the deviator, in the longrun no deviation actually occurs since every selfishly motivated contributor anticipates that
17
the gain from deviation would prevail only in the very short run, as it would trigger more
deviation until none of the selfishly motivated truth-tellers contributes (i.e. allocation 2).2
Provided that this process eventually leads to an allocation where conditions (i) and (ii) hold
simultaneously, any such allocation will represent a stable equilibrium, which must be Paretooptimal.
However, it should be emphasized that the interaction of duty and selfishly motivated
truth-tellers may lead to a Pareto-optimal allocation of nonrival public goods only if the subgroup sizes are compatible with the prevailing IWC and IWD critical values of the selfishly
motivated individuals within the group.3 Finally, with three or more duty motivated truthtellers in the group of five, no selfishly motivated truth-teller has an incentive to contribute,
because contributing cannot yield any long-term gain. Yet, as can be seen from Table 2, in
each such case the allocation is already Pareto-optimal (allocations 4, 5, and 6).
To summarize, provided that there are sufficiently large sub-groups and compatible
critical values for IWC and IWD, the interaction of duty and selfishly motivated truth-tellers
2
If IWC = IWD = 1 holds for all four selfishly motivated individuals only allocations 2, 5 and 6 can emerge, but
neither 2 nor 5 can be stable over time because conditions (i) and (ii) or not simultaneously fulfilled. Therefore,
if allocation 2 prevails, all four will contribute in the next period or round, which leads to allocation 6. Then, if in
one of the following periods someone deviates from contributing, allocation 5 emerges. Yet, this would
immediately trigger more deviation (because of IWD = 1) so that allocation 2 re-emerges in the following period
and the process starts again. Allocation 6, however, may prevail in the long-run as in this case conditions (i) and
(ii) hold simultaneously, so that nobody has a long-run incentive to deviate. Also, even if deviating occurs
accidentally, allocation 6 should re-emerge as indicated above.
3
For example, assume that c.p. IWC critical value 2 holds for all four selfishly motivated individuals. Then,
allocation 2 emerges and prevails in the long-run, because condition (ii) would never be fulfilled. Likewise, if
c.p. IWD critical value 2 holds for all four selfishly motivated individuals, allocation 5 would also represent a
stable long-run equilibrium allocation. Moreover, if four individuals have difference IWC and IWD critical
values, sequential joining in or deviation may occur, if the critical values are compatible. Further, if the group of
selfishly motivated truth-tellers is not large enough, in our example, if there are just one or two of them, no longrun contribution equilibrium can emerge. This is because the attainable allocations 3 and 4 yield a payoff of just
8 or 12, respectively, which is lower than 14 and, therefore, condition (i) is not fulfilled so that deviation from
contribution will occur over time and allocation 2 eventually re-emerges in the long-run. Based on the same
argumentation it follows that with two duty motivated truth-tellers, three selfishly motivated truth-tellers are
necessary for a stable contribution equilibrium, which would then be allocation 6.
18
may indeed lead to a stable voluntary contribution environment that allows for the Paretooptimal provision of public goods. Thus, the above proposition can be put more concisely:
In comparison with a group of individuals that contains an empty set of duty motivated
truth-telling individuals, any group of individuals that contains a non-empty set of
duty motivated truth-telling individuals has a higher potential to provide itself with a
Pareto-optimal amount of public goods. The probability of reaching a Pareto-optimal
provision level of public goods is the higher, the larger the subset of duty motivated
truth-telling individuals is and the more favorable critical IWC and IWD values are
maintained by selfishly motivated truth-tellers within the group.
This result is not only supported by the experimental evidence referenced above, it also
indicates that moral education and other efforts that promote duty motivated truth-telling are
welfare enhancing activities, even if they do not succeed in convincing large parts of the
population.
3.2
Access to Essential Goods and Services
Goods and services are considered essential for an individual if they either ensure the survival
of the individual or, if they have the potential to increase the objective probability that the
individual survives. In principle, such goods and services may be consumed in a rival or
nonrival manner. In this section, however, I shall confine myself to goods and services that
are consumed in a rival manner. Real world examples of essential goods and services of this
type include drinking water, basic food, medicine and medical treatments for mortal diseases
such as HIV/AIDS, blood, human organs and so on.
To be sure, in a market setting individuals demanding such goods and services would
simply go and buy them from a supplier at the stipulated market price. But such cases are not
19
considered here. Rather, the focus is on cases where adherence to the price-exclusion
principle would rule out, or at least threaten the survival of the individuals. Under such
circumstances the price-exclusion principle may be lifted, that is, these goods and services are
made ‘public by design’. Kaul et. al. (1999, 2003, 2006) and some contributors to their
volumes apply this concept, among several others, to a variety of global public goods.
Note, however, that for some essential goods and services, e.g. blood or human organs, no
market may exist. Because of severe technical problems (e.g. selling one’s heart implies one’s
death) or ethical concerns, monetary incentives may not generate sufficient supply (e.g. see
Blankart (2002) and the literature referenced there). In addition, due to ethical concerns, the
price-exclusion principle may not be applied for the allocation of demand. For example, it
might be considered unethical that wealthy individuals with less urgent medical needs would
be able to jump the queue by paying the highest price for a human organ. Yet in these specific
cases the lack of an adequate supply does not allow for making the goods ‘public by design’.
Rather, other allocation mechanisms such as the ‘urgency of need’ may be chosen instead.
Hence, the concept of making goods ‘public by design’ is limited to goods that are consumed
in a rival manner and which do not exhibit any supply problems, if the price-exclusion
principle is otherwise applied.
Moreover, making a good which is consumed in a rival manner ‘public by design’
effectively amounts to a transfer in kind. But to avoid a transfer ‘in cash’ versus ‘in kind’
discussion, I assume that a recipient’s preferences for the goods and services under
consideration are such that both types of transfer would lead to exactly the same outcome.
Also, to focus exclusively on public goods provision, I assume that all transfers in cash will
be pooled and then used for making goods ‘public by design’. In addition, it is worth noting
that the term ‘public’ implies here that the transfer in kind is made to a group of individuals,
which may be defined in one way or another, rather than to a single individual.
20
From an ethical perspective, the question then is: What motivates individuals or political
institutions to make goods ‘public by design’? Upon reflection, virtues such as charity and
justice may play an important role in answering this question. With respect to the provision of
public goods, related concepts such as altruism, ‘warm-glow’ giving, and fairness have
received considerable attention (e.g. see Batina and Ihori (2005, pp. 218–225) for an
overview). Altruism is the contrary of egoism or selfishness and essentially means that an
altruist’s utility depends on the utility of one or more other individuals. Following Fender
(1998, p. 144) an altruist’s utility function, Ua, could be formalized as:
Ua (ya, U1(y1), …, Uj(yj), …, Um(ym)) ,
(8)
with: ∂Ua/∂ya > 0, ∂Ua/∂Uj · ∂Uj/∂yj > 0, j = 1, …, m.
Where ya denotes the altruist’s own consumption of the private good Y and Uj denotes the
utility of the j-th individual which has been granted access to Y in proportion yj according to
equation (3). That is, the private good Y has been made ‘public by design’ in a quantity of Yj,
with:
Yj =
m
∑ j =1 y j
.
(3a)
Note that in (8) the utility of the altruist depends positively on yj, for all j = 1, …, m, or in
other words, on the individual amounts the j-individuals receive.4 In contrast, ‘warm-glow’
giving refers to a situation where the donating individual derives some utility from the act of
giving itself, rather than from the amount that is given.
Equation (9) also makes it clear that an altruist may maximize utility by giving part of his
or her income or wealth to others.5 Altruism may therefore still fall into the realm of
rationality, but as noted it cannot be compatible with a narrow definition of self-interest
because with given means, Y a , any spending on Yj necessarily reduces ya, if Y a = ya + Yj
4
In this context it is also important to note that, ∂Uj/∂yj ≠ ∂Ui/∂yi , may hold for all yj = yi , with i ≠ j and i,j = 1,
…, m, and, that likewise, ∂Uj/∂yj = ∂Ui/∂yi may be true for certain yj ≠ yi , with i ≠ j and i, j = 1, …, m.
5
Note, however, that according to (8) an altruist may also benefit from donations made by third parties to the m
individuals.
21
holds. 6 This notwithstanding, donating may comply with a broader definition of self-interest
such as enlightened self-interest or long-term self-interest (e.g. see Fender 1998, p. 145), if
spending on Yj has the potential to generate future direct benefits for the altruist.7 For
example, in comparison to others, altruists may just be individuals with a longer planning
horizon and more risk adverse preferences and, therefore, simply want to buy an implicit
insurance policy and regard their donations as a premium for such a policy. Khalil (2004, p.
98), however, goes even further and defines altruism as charity and argues that “the act of
charity can, but with some difficulties, find an accommodation in the Homo economicus
house of neoclassical economics”.
Equation (3a) points to another important ethical aspect. Given that altruists have limited
means but still aim at utility maximization, lifting of the price-exclusion principle for a group
of m individuals then raises the essential question: What is the ethically acceptable allocation
mechanism to determine the size of m and the size of yj for all j’s? It is here that virtues such
as justice come in as motivational forces for non-selfish behavior patterns. Altruists, warmglowers, philanthropists and similarly minded individuals may simple aim at determining a
size of m and of the yj’s which they consider being ethically just. For example, the objective
fact that some individuals got into a certain situation by chance, rather because of their own
deliberate action, may qualify as an indicator that helps to identify those who should be
allowed to join the m set on the grounds of justness. Natural catastrophes, accidents and the
like may serve as an example. Hence, if non-governmental institutions aim at making some
goods ‘public by design’ for a set of individuals and in specified quantities per individual, the
number and the size of the donations they get for this task will most likely depend on their
choice of m and the yj’s. Basically the same is true for public or political institutions aiming at
6
As Khalil (2004, p. 110) and others have noted: „Interest is about ends such as self-, other-, and group-benefits,
while rationality of action concerns the maximization of ends in light of means“.
7
As a simple example, the consumption of Y may be associated with positive consumption externalities and the
latter may depend positively on the number of consumers, m, of Y. Consumption of a vaccine agent may be a
case in point. However, other examples may show a more complex relation. In general, such cases are discussed
in the relevant literature under the heading ‘interactional theories’ (e.g. see Khalil 2004, pp. 99–104).
22
this task but choosing their power to tax to raise the necessary means. Unless they choose m
and the yj’s in accordance with the ethical preferences of their tax payers they may face
resistance in the form of tax evasion and the like.
But it must be emphasized again that justice may be just one motivational force among
many others that help generating behavior patterns that are non-selfish, at least in a narrow
sense.
3.3
Limits of Consumer Sovereignty
Ethical concerns may also call for limiting individual consumer sovereignty and, therefore,
may challenge proposition 2 mentioned in the introduction. The most prominent concept of
this kind is that of merit or demerit goods, which was introduced by Richard A. Musgrave in
1957 (see also Musgrave 1959, 1987, 1990). Although the concept of merit or demerit goods
is closely related to the public goods concept, so that some overlapping may occur, the two
concepts are not entirely identical. Musgrave (1987, p. 452) prefers to use the term for
settings where individual preferences differ from norms or preferences of the community of
which the individual is a member. Referencing Colm8, Musgrave (1987, p. 452) states:
“Without resorting to the notion of an ‘organic community’, common values may be taken to
reflect the outcome of a historical process of interaction among individuals, leading to the
formation of common values or preferences which are transmitted thereafter”.
Hence, merit goods are goods the consumption of which is regarded as a good thing from
a communitarian perspective, but not necessarily from an individual perspective, while
demerit goods are goods where consumption of is regarded as a bad thing from a
communitarian perspective, but not necessarily from an individual perspective. The common
element in both cases is that the community may need to use some sort of force to impose its
views on certain individuals, thereby limiting their consumer sovereignty. Therefore, the
8
For details on the views of Gerhard Colm and the role of the merit goods concept in the evolution of the theory
of public goods see Pickhardt (2005b, pp. 283–284) and the literature referenced there.
23
provision of merit goods and the prohibition of demerit goods are often regarded as legitimate
tasks for a political institution. To this extent, merit or demerit goods may be regarded as
public goods in the sense of the definition presented in section 2.1.3 and, in addition, merit or
demerit goods may also be consumed in a rival or nonrival manner. Thus, the important
difference to the public goods concept is that the latter has no room for any interference with
individual consumer sovereignty. Drug use or prostitution are often quoted as examples for
demerit goods, and provision of free milk for school children is a classical example for a merit
good. The compulsory adding of iodine salt to the food chain through backed bread, in order
to avoid thyroid related problems, may serve as a more modern example of a merit good.
As noted, the merit and demerit goods concept rests on communitarian values or
preferences that have emerged from a historical, if not evolutionary, process of interaction
among individuals. Although no ‘organic’ conception of society is employed, the focus on
communitarian values indicates a certain proximity to the views of the historical schools
(Pickhardt 2005b, p. 286). Then, given the importance of communitarian values for the merit
and demerit goods concept, one important question is: Why do such communitarian values
emerge? Apparently, this is because the community has ‘learned’ during a historical or
evolutionary process that the consumption of demerit goods is likely to cause future costs for
the society, and that the consumption of merit goods generates future benefits for the society.
This indicates that the merit and demerit goods concept involves a kind of communitarian
long-term self-interest. In fact, it seems that this sort of self-interest justifies limiting certain
individual freedoms, in particular, the freedom of choice. Also, note that this focus on the
overall consequences of actions relates the concept to the consequentialist theories mentioned
in section two.
Finally, it seems to be worth noting that the merit and demerit goods concept has regained
some attention through the work of Besley (1988), Feehan (1990), and Racionero (2001) in
24
normative Public Finance as well as in Public Choice orientated literature through the work of
Brennan and Walsh (1990) and Ver Eecke (2003), among others.
4
Concluding Remarks
In this paper I have tried to shed some light on the role ethics may play in providing public
goods. Although the scope of the issue and limited space did not allow for an in-depth
treatment, the preceding sections have demonstrated that the entire discussion revolves around
one central question: Is it possible to integrate ethically motivated behavior patterns into to
mainstream neoclassical economics or not?
I have given a mixed answer to this question. For example, while ethically motivated
behavior patterns do not comply with an individual’s narrowly defined myopic self-interest, in
many cases, these behavior patterns may be explained by an individual’s long-term or
enlightened self-interest. This was demonstrated with respect to all three impact channels
discussed in section three. Some ethically motivated behavior patterns, however, may not be
explained by even the broadest definition of self-interest and, therefore, remain alien to any
economics framework. This notwithstanding, such behavior patterns can play an important
role in welfare enhancing procedures. This was demonstrated in section three with respect to
Kantian duty motivated truth-telling, which may help to establish and maintain a Paretooptimal voluntary contribution environment for goods that are public because they are
consumed in a nonrival manner. Finally, this paper has demonstrated that any analysis of the
role ethics may play in the provision of public goods, particularly any identification of
motivational forces, requires rather subtle definitions and delineations of concepts. Despite
the rich body of existing theoretical and empirical research on the issue, this aspect alone will
make new investigations a promising task for many years to come.
25
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