The Public Commodities Problem

One person's public good is another's public bad and so, perhaps, the public goods problem could be more generally described as the public commodities problem, in which disagreement about the basic goal of a spending program complicates the decision of how much to spend to achieve that goal. Although public goods spending is a continuous variable, it often has a binary goal such as win a war, deter crime, provide transportation, or reduce poverty. To decide how much spending is necessary to achieve that goal, society must answer both a normative question—Should the government adopt the goal of this spending program?—and a positive question—Given this spending program's goal, what is the optimal level of spending? If the answer to the first question is yes, it may be desirable that the level of spending be set at the optimal level of spending given the stated goal; spending, however, may not be set at that level. This paper uses the median voter theorem to demonstrate that those who do not believe the government should pursue the stated goal of a spending program, and those who believe that the government can achieve the goal with relatively less spending, can form a coalition to keep spending at a level that most supporters (and possibly most citizens) believe objectively is the optimal amount. Thus, even if voters have rational expectations about the amount necessary to achieve a goal, disagreement about whether or not to pursue the goal can cause an underfunding bias.