HOW SHOULD A PUBLIC GOOD BE PROVIDED? A TRANSACTION COST APPROACH

This paper investigates how the trade-off between organization costs, transaction costs and economies of specialization may affect the way public goods are provided. In doing so, it considers two ways of providing a public good. One is collective provision where users organize themselves to jointly finance the public good which is produced by a specialized firm. The other is market provision with bundling where a firm produces the public good and a private good and sells them as a bundle. Both methods of public goods provision deal with the problem of non-excludability. The first method involves organization costs, but can take advantage of specialization economies; the second method avoids organization costs, but may incur some transaction costs and forgoes the benefit of specialization economies. Which method is superior depends on the relative magnitudes of organization costs, transaction costs, specialization economies as well as other features of the economy such as population size.