Musgrave’s Model of Public Expenditures

With The help of Musgrave’s model, it is shown that government intervention is necessary for the efficient provision of public goods.

Musgrave’s Theory of Public Expenditures

Musgrave has recognized three essential roles of the government in an economy that is allocation, distribution and stabilization.

The allocation role of the government is to allocate resources for the optimal production of the public good, which would not be provided efficiently by the private players in society.

The distributive role of the government is to ensure the optimal distribution of income and wealth, which might not be in market provision. This role ensures equitable distribution of the efficiency which is required in a society.

The stabilization function of the government ensures that the macroeconomic variables of employment, output and prices are being produced and maintained at a stable rate. This arena of the role of government is macroeconomic; it is hence more of fiscal policy for an economy rather than only a theory of public finance. Thus, the public theory deals with the allocation and distributive role of the government.

Under Musgrave’s model, policies to adjust the inter-individual or household distribution of a nation’s income and wealth- that is, the distribution function- also accrue to the centre. This is because the full (assumed) mobility of both the rich and the poor between subnational entities makes it impossible for one such government to have more generous policies towards the poor than others if it has to finance these policies itself, be it only at the margin. Either the poor will move in, overloading the expenditure side and thus requiring higher taxes, or the rich will move out, starving the revenue side, or both will happen simultaneously.

A subnational government could have pro-rich policies to encourage the outmigration of the poor, but this would be undesirable from an overall allocative perspective. This would lead to segregation and, thus, to a reduction in the externalities that emerge from mixing in a given territory of various groups. However, there are costs associated with mobility.

In small countries (Belgium, for example), differences in ethno-linguistic-religious characteristics between subnational entities could reduce mobility from one jurisdiction to another one. In large countries, distance and its associated costs may be a barrier to mobility even if there are no differences in these characteristics. Thus it is conceivable to have some income distribution at the sub-national level.

Musgrave’s particular interpretation of the theory of public finance is regarding the non-excludability of the members. Non-exclusion from the consumption of a public good causes free riding to occur, which leads to preference-revelation problems. This first instance of market failure can be combined with a second one. When goods are non-rival, their free availability to everyone – made possible only through public provision – is socially desirable (Pareto improving). In retrospect, it is obvious that this policy recommendation rests on the assumption of a benevolent government (that does not fail).

Under Musgrave’s model, policies adjust the inter-individual / household distribution of a nation’s income and wealth; that is, the distribution function also comes under the functions of the centre. This is because the movement of poor and rich between the subnational grounds makes it impossible for one government to have more generous policies towards the poor than others if it has to finance these policies itself. The poor will move in, overloading of the poor, but this would be undesirable from the migration of the poor, but this would lead to segregation and thus to an overall allocative perspective.

The costs associated with the movement with mobility could reduce mobility between the jurisdictions. The efficiency argument of the allocative policy is the traditional for the subnational role. Efficient provision of the public good requires only subnational activity. Indeed, that is not the case. Some social goods, such as national defence, public health, courts, etc., are geographically limited but have nationwide benefits.

The recognition that allocative function is an intergovernmental responsibility applies not only to broad functions of services but also within the functions. Education is a good example here. A nation as a whole has a strong interest in a well-educated population as it does the locality where the service is provided.

There are four criteria for assigning functional responsibilities across types of governments:

(a) Economies of Scale: varies across goods and services. Economies of scale are significant in broadcasting, where additional units per viewer drop when the number of viewers of a given program doubles but is negligible in the provision of individual health services such as surgical treatment. The existence of economies of scale constitutes an argument for a regional government to provide a particular good or service.

(b) Heterogeneity of Preferences and Circumstances: groups living in different parts of a country may display strong heterogeneity of preferences or may face different environments in terms of climate and topography. They may prefer and need different amounts of services and different qualities, too. Decentralization is appropriate to address these needs if these groups are separated by borders that match those of sub-national governments.

(c) Presence of Externalities: negative or positive externality has an impact on the distribution of public goods. If some activities of one government have significant external effects on the individual or business located in another jurisdiction or on other government types, then these activities should be well coordinated among the affected governments.

(d) Emulation: Also referred to as competition, which helps increase the introduction of best practices in government requires at least two and introduce best practices in government, requires at least two or more units in a given activity. This argument is for the decentralization of government activities.

Read More in: Theory of Public Finance

1. Public Finance: Meaning, Nature & Scope
2. Role of Government in Economy
3. Role of Government in Mixed Economy: Public & Private Sector
4. Role of Government under Cooperation and Competition
5. Role of Government in Economic Development and Planning
6. Concept of Public Goods, Private Goods, and Merit Goods
7. Concept of Market Failure and Functions of Government
8. Market Failure and Functions of Government: Decreasing Costs
9. Market Failure and Functions of Government: Externalities
10. Market Failure and Functions of Government: Public Goods
11. Future Market: Meaning, Role & Uncertainty
12. Concept of Information Asymmetry
13. Theory of Second Best: Concept & Explanation
14. Problem of Allocation of Resources: Public & Private Mechanisms
15. Preferences: Meaning, Types & Problems of Preference Revelation
16. Preference Aggregation & Its Mechanism
17. Voting Systems, Direct Democracy, Representative Democracy, Leviathan Hypothesis & Arrow’s Impossibility Theorem
18. Economic Theory of Democracy: Concept & Explanation
19. Politico Eco Bureaucracy: Concept & Explanation
20. Rent-Seeking and Directly Unproductive Profit-Seeking Activities
21. Rationale for Public Goods: Concept & Explanation
22. Benefit Theory or Voluntary Exchange Theory
23. Lindahl Model: Concept, Equilibrium & Limitations
24. Bowen Model: Concept, Advantages & Limitations
25. Samuelson’s Model of Public Expenditure
26. Musgrave’s Model of Public Expenditures
27. Demand Revealing Schemes for Public Goods
28. Vickery-Clarke-Groves Mechanism
29. Groves-Ledyard Mechanism
30. Tiebout Model: Concept, Assumptions Equilibrium & Simple Tiebout Model
31. Theory of Club Goods
32. Keynesian Principles of Stabilization Policy
33. Difference Between Keynesian Economic Thought and Others
34. Role of Expectations and Uncertainty in Formulating Stabilization Policy
35. Intertemporal Markets Efficiency & Failure
36. Liquidity Preference Theory
37. Diamond-Dybvig Banking Model
38. Preference Shocks, Adverse Selection & Central Bank
39. Equilibrium Deposit Contract
40. Social Goods and Its Effect on Stabilization Policy
41. Effect of Infrastructural Facilities on Stabilization Policy
42. Effect of Distributional Inequality on Stabilization Policy
43. Effect of Regional Imbalances on Stabilization Policy
44. Wagner’s Law of Increasing State Activities: Explanation, Graph & Criticism
45. Peacock-Wiseman Hypothesis: Explanation, Graph & Criticism
46. Public Expenditure: Concept, Objectives, & Public vs Private Expenditure
47. Pure Theory of Public Expenditure
48. Structure & Growth of Public Expenditure in India
49. Trends, Lessons & Priorities in Public Expenditure in India
50. Social Cost-Benefit Analysis: Project Evaluation, Estimation of Costs & Discount Rate
51. Performance Based Budgeting and Zero Based Budgeting
52. Theories of Tax Incidence: Concentration Theory, Diffusion Theory & Modern Theory
53. Tax System and Its Principles
54. Equity Principle and Efficiency Principle of Taxation: Meaning, Explanation & Examples
55. Ability to Pay and Benefits Received Principle of Taxation
56. Theory of Optimal Taxation: Excess Burden & Distortions of Taxation
57. Deadweight Loss of Taxation: Causes, Measurement & Example
58. Concept of Equity & Efficiency in Economics
59. Trade-Off Between Equity and Efficiency: Meaning & Example
60. Theory of Measurement of Dead Weight Loss
61. Double Taxation: Meaning, Desirability, Forms & Solution
62. Solution to Problem of Double Taxation: Intra-Country & International
63. Double Taxation Avoidance Agreement (DTAA) and Indian Policy
64. Classical View on Public Debt
65. Compensatory Aspect of Public Debt Policy
66. Public Debt or Borrowings: Concept, Need, Sources & Types
67. Concept of Public Debt or Public Borrowings
68. Need for Public Debt or Public Borrowing
69. Sources of Public Debt
70. Classification of Public Debt
71. Burden of Public Debt: Meaning, Types & Explanation
72. Debt Through Created Money or Deficit Financing
73. Public Debt (Public Borrowings) and Inflation (Price Level)
74. Crowding Out of Private Investment and Activity
75. Principle of Public Debt Management and Debt Repayment