Musgrave’s Model of Public Expenditures

7 months ago

Atiqur Rahman

8 minutes

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.

Musgrave’s Model of Public Expenditures

Musgrave’s Theory of Public Expenditures

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

Read More in: Theory of Public Finance

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Musgrave’s Theory of Public Expenditures

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

Read More in: Theory of Public Finance

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Related

Share Your ThoughtsCancel reply