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.