Économie publique/Public economics 18-19 | 2006/1-2 Varia Global Public Economics: Public Goods and Externalities Agnar Sandmo Édition électronique URL : http://journals.openedition.org/economiepublique/4282 DOI : 10.4000/economiepublique.4282 ISSN : 1778-7440 Éditeur IDEP - Institut d'économie publique Édition imprimée Date de publication : 1 octobre 2007 ISBN : 44-22-89-M ISSN : 1373-8496 Référence électronique Agnar Sandmo, « Global Public Economics: Public Goods and Externalities », Économie publique/Public economics [En ligne], 18-19 | 2006/1-2, mis en ligne le 17 octobre 2007, consulté le 12 septembre 2020. URL : http://journals.openedition.org/economiepublique/4282 ; DOI : https://doi.org/10.4000/ economiepublique.4282 © Tous droits réservés public economics économiepublique Revue de l’Institut d’Économie Publique Deux numéros par an o n 18-19 – 2006/1-2 économiepublique sur internet : www.economie-publique.fr © Institut d’économie publique – IDEP Centre de la Vieille-Charité 2, rue de la Charité – F-13002 Marseille Tous droits réservés pour tous pays. Il est interdit, sauf accord préalable et écrit de l’éditeur, de reproduire (notamment par photocopie) partiellement ou totalement le présent ouvrage, de le stocker dans une banque de données ou de le communiquer au public, sous quelque forme et de quelque manière que ce soit. Imprimé en France. La revue économiepublique bénéficie du soutien du Conseil régional Provence-Alpes- Côte d’Azur ISSN 1373-8496 Dépôt légal octobre 2007 – no imprimeur 442289M dossier symposium Conférences des Journées Louis-André Gérard-Varet #5 Public Economic Conference LAGV #5 Global Public Economics: Public Goods and Externalities Agnar Sandmo ∗ Summary This article extends the normative analysis of public goods and externalities to an international setting. The first part considers the optimal allocation of a global public good. Whether global production efficiency is desirable depends on the existence of international lump sum transfers; in the absence of such transfers and with an egalitarian social welfare function a poor country should bear less of the burden of producing global public goods than implied by production efficiency. The second part of the paper analyzes global externalities and shows that internationally uniform Pigouvian taxation is only optimal in the presence of ideal lump sum transfers. Résumé Cet article étend l’analyse normative des biens publics et des externalités à un environnement international. La première partie considère l’allocation optimale d’un bien public glo- bal. Le caractère désirable de l’efficacité productive globale dépend de l’existence de transferts forfaitaires internatio- naux. En l’absence de ces transferts et avec une fonction de bien-être, sociale égalitariste, le fardeau supporté par un pays pauvre en raison de la production de biens publics globaux devrait être moins lourd que celui impliqué par ∗. Norwegian School of Economics and Business Administration (NHH). This paper was prepared for presentation at the Journées Louis-André Gérard-Varet, Marseille, 16-17 June 2006. économiepublique no 18-19 (2006 / 1-2), 3-21 dossier Agnar Sandmo l’efficacité productive. La seconde partie de l’article analyse les externalités globales et montre qu’une imposition inter- nationale uniforme à la Pigou ne peut être optimale qu’en présence de transferts forfaitaires eux-mêmes optimaux. Keywords: Public goods, externalities, normative analysis, interna- tional setting. Mots clés : Biens publics, externalités, analyse normative, environ- nement international. J.E.L. : D62, H41, H87. Some time ago, when I was in a process of writing an article on public goods 1 for the second edition of The New Palgrave Dictionary of Economics, I asked my editor whether there would be a separate entry on “Global public goods”; if not, I would like to include some material on this topic. He replied that there would not in fact be a separate article, and that I was welcome to go ahead with my plans. He then added that he had searched the electronic master list for all entries and was amazed to see how many authors had introduced their articles by using the word “global”. Interestingly, however, it turned out that in all these cases “global” referred to analytical concepts like global curvature and global games, not to global economic issues in the sense that I am using the word here. Perhaps this is an indication that we economists - and public economists in particular – tend to pay too little attention to problems that concern the world as a whole, and it is with the hope of contributing to a more global perspective on our subject that I have chosen this topic for my presentation 2. Global public goods is of course not an entirely neglected topic in the recent literature. E.g., there have recently come out two collections of articles (Kaul, Grunberg and Stern 1999 and Kaul, Conceicao, Le Goulven and Mendoza 2003) that look both at the theory, the empirical relevance and the implications for economic policy. Another sign that the interest in the field is increasing is the fact that it has been chosen as the theme of the 2007 Congress of the International Institute of Public Finance. 1. This article will be a revision and extension of Sandmo (1987). 2. The text builds on and integrates material from two previous articles of mine (Sandmo, 2003, 2005). no 18-19 - 2006 / 1-2 4 Global Public Economics: Public Goods and Externalities 1. The Theoretical Basis The obvious starting point for any application of the theory of public goods is the original contribution by Paul Samuelson (1954, 1955). His classic papers contain few explicit references to the jurisdictional framework in which decisions about public goods provision are assumed to take place, but a natural interpre- tation is that he primarily had in mind the nation-state. However, it is also a reasonable assumption that he saw the theory as being applicable to several types of jurisdictional frameworks. Such applications in later years have mainly been in the area of local public goods and local public finance. Only recently has the attention of economists been turned to goods that are public in regard not only to the population of a particular country, but with respect to the world population as a whole. The qualitative properties of the global environment offer perhaps the most obvious examples of such goods, but there are many others. Knowledge is an obvious and important example, while public health is another public good with important international dimensions. At the institutional level, important examples of global public goods are institutions required to promote world peace and international security or to sustain the global market economy. The Samuelson formulation is cast in the framework of welfare economics. Starting from an individualistic welfare function, the aim of the analysis is to characterize an optimal allocation of resources when social welfare is maximized subject to a production possibility constraint. The most famous result to emerge from the analysis is the “Samuelson rule”: The sum of the marginal rates of substitution, taken over all consumers in society, between the public good in question and some numéraire private good, must be equal to the marginal rate of transformation in production. An alternative interpretation is that the aggregate marginal willingness to pay for the public good must equal its marginal cost of production. A central concern in the following discussion is the question of the validity of the Samuelson rule in a global context. Is this the way that we should think about the provision of global public goods? If not, what are the changes or modifications that need to be introduced before the theory can be applied to this type of public good? It will be shown that the most problematic part of the extension concerns the desirability of production efficiency and the separation of equity and efficiency conditions which play such important roles in Samuelson’s analysis. Some of Samuelson’s examples of pure public goods were “an outdoor circus or national defense” (Samuelson, 1955). Apart from their tongue-in-cheek nature, these are examples where we are led to think of the goods being provided by explicit choice of some well-defined decision maker, but for many public goods this is a simplified picture. Whether we think of the natural or the cultural économiepublique 5 dossier Agnar Sandmo environment, it is clear that at any point in time these goods are partly determined by exogenous forces; they are given by the laws of nature or by human activities of the past. Their current and future availability is also determined by the actions of a large number of consumers and producers. The effects of these actions are sometimes negative, sometimes positive, and at least in the present context it is natural to think of externalities as unintended effects of private actions on the availability of public goods. There is accordingly a close connection between the normative theories of public goods and externalities. 2. A Model of Resource Allocation: Basic Assumptions The notion of a social welfare function, so central to the Samuelson theory of public goods, is viewed by many with a good deal of scepticism. This stems partly from the Arrow impossibility theorem (Arrow, 1951), partly from the criticism by Buchanan 3 and others of the public choice school that the very notion of an aggregate social welfare function is inconsistent with the values of a democratic society. Although the scepticism would seem to apply a fortiori to the notion of a global social welfare function, it will, nevertheless, be used below. I should stress, therefore, that my use of this concept does not in any way deny the force of the Arrow theorem. It is not meant to imply that there exists a political system of global preference aggregation, nor that there is a benevolent global planner who manages the world’s resources according to his ethical values.