The symmetry of private and public failures
Consider the following textbook argument: Public goods are under-supplied on a purely private market because the suppliers cannot get all the beneficiaries to pay. The same also applies for the other type of hard to exclude good — common pool resources — which are predictably under-managed, leading to tragedies of the commons. The difficulty to exclude people from consuming or using the good means free riding is a serious issue. Because suppliers/managers cannot get everyone who consumes/uses the good to pay, they don’t have enough revenues to fully support the actual level of consumption. This free riding market failure thus leads to under-investment — relative to the hypothetical optimum — in the production or management of public goods and common pool resources. The quality of public goods suffers and the commons can be depleted.
We can also view this as a failure of revealed preference: because free riding is an option, some of the consumers who actually value the good do not reveal their preference by means of paying – hence sending the wrong signal to the producers of the good. As far as the private producers of the public good are concerned, when they look at their revenues, they get the signal that the public is relatively uninterested (compared to their true interest, as revealed by their patterns of use) in the good they’re providing.
One of the big ideas in the Calculus of Consent is that the exact same logic works in reverse for collective action under any decision rule less than unanimity, e.g. under majority rule. When people vote, the winners of the vote do not experience the full cost of their decision — that cost is laid upon the people who voted against and lost. So while private producers of public goods don’t experience the full BENEFIT of the good they’re providing, the majority-rule collective producers of public goods don’t experience the full COST. Hence, the same free-riding logic now works in reverse, predicting that collective decision making (under less than full unanimity) will over-invest in the production of public goods and in the management of common pool resources.
This argument is laid out in all its tedious details in chapters 9-13 and then summarized in chapter 14, “The Range and Extent of Collective Action”:
The analysis of Chapters 10, 11, and 12 demonstrated that the organization of collective action through simple majority voting tends to cause a relative overinvestment in the public sector if the standard Paretian criteria are accepted. … This is because the majority-voting rule allows the individual in the decisive coalition to secure benefits from collective action without bearing the full marginal costs properly attributable to him. In other words, the divergence between private marginal cost and social marginal cost (the familiar Pigovian variables) is always in the same direction. (p. 200)
With this in mind, Buchanan and Tullock don’t just conclude that collective decision making oversteps its efficient bounds. They also make a more radical point about abandoning the idealized perfect efficiency benchmark altogether:
In one sense, therefore, we can quite properly say that all decision-making rules embodying less than full consensus will tend to cause relatively too many resources to be devoted to the public sector–too many relative to that idealized allocation of resources that the omniscient observer, knowing all utility functions over time, might be able to describe. In another sense, however, if we leave such omniscience out of account, no such conclusion can be reached. … At this more meaningful level of discussion, when we consider realizable organizational alternatives, no normative judgment can be formed concerning the extent of the public sector from a simple comparison of an existing organization with the bench-mark or ideal solution. Such meaningful judgments can be made only on the basis of a comparison with realizable and relevant alternatives. To say, for example, that majority rule tends to over-extend the public sector relative to some idealized and unattainable benchmark allocation of resources is descriptively meaningful, but the statement is useless … The only meaningful overextension of the public sector must refer to realizable alternatives, and unless interdependence costs [i.e. external costs + decision-making costs] can be shown to be reduced under these alternatives, normative statements cannot be made. As Frank Knight has often remarked, “To call a situation hopeless is equivalent to calling it ideal.”