Public goods and public bads

• Author: Richard Cornes,Wolfgang Buchholz,Dirk Rübbelke
• DOI: http://doi.org/10.1111/jpet.12298
• Published date: 01 August 2018
• Date: 01 August 2018

Received: 3 May2017 Revised: 13 November2017 Accepted: 15 March 2018

DOI: 10.1111/jpet.12298

ARTICLE

Public goods and public bads

Wolfgang Buchholz1Richard Cornes2Dirk Rübbelke3

1UniversitätRegensburg and CESifo Munich,

Germany

2AustralianNational University Canberra, Aus-

tralia

3TechnischeUniversität Bergakademie Freiberg,

Germany

∗Thispaper is a revised and considerably

extendedversion of Cornes and Rübbelke (2012)

thenentitled “On the Private Provision of Con-

tentiousPublic Characteristics.”

Theauthors want to thank two referees, the par-

ticipantsof the conference “Global Environmen-

talChallenges—From International Negotiations

toLocal Implications” at the ZEW Mannheim in

October2016, especially Todd Sandler,and Anja

Brummeand Michael Eichenseer for their very

helpfulcomments.

In many empirically relevant situations agents in different groups

are affected by the provision of a public characteristic in divergent

ways. Whereas for one group it represents a public good, it is a pub-

lic bad for another group. Applying Cornes and Hartley's aggrega-

tive game approach, we analyze a general model in which such

contentious public characteristics are present and are provided

cooperatively. In particular, we establish neutrality results with

respect to redistribution and growth of income, infer the effects of

preference changes and coalition formation, and present a technol-

ogy paradox. Finally, we compare the outcome of voluntary provi-

sion of the contentious public characteristic with the Pareto-optimal

solution, highlighting a potential conflict between equity and effi-

ciency in this case.

1INTRODUCTION

It is a common phenomenon that members of different groups are simultaneously affected by some economic activity

but have opposing preferences concerning its consequences. Climate protection is usually considered to be a global

public good whose provision is beneficial for all countries in the world. This conceptualization, however,ignores that

global warming—within some limits and apart from catastrophic outcomes producing grave losses for all countries—

might be welfare-improving for some regions and countries. Countries likeCanada or Russia may benefit from a higher

temperature, for example, through reduced heating costs, increased agricultural output, and improved prospects for

the tourism industry,which implies that climate protection can become a public bad for these countries. Therefore, the

effects of climate policy are “contentious” so that a conflict of interest between the beneficiaries and the victims of

greenhouse gas abatement arises.

In the field of environmental economics, opposing utility effects are not restricted to climate policy.In general, envi-

ronmental policies are disadvantageous for agents who do not share “green preferences” underlying these policies

but yet have to bear part of their cost. Forexample, Bostedt (1999) has observed that, within Sweden, many lovers of

nature consider the Swedish wolf as a public good. For reindeer herders in the North it is a public bad instead since

the wolf preys on the migrating reindeers. One can cite many other examples of animals that are, for one section of

the community,a public good while another group regards their preservation as costly, because theyare predators of

domesticated animals, destroyers of plantations, carriers of diseases or come directly into conflict with human settle-

ments like elephants tramplinginto Indian villages.

Journal of Public Economic Theory.2018;20:525–540. wileyonlinelibrary.com/journal/jpet c

2018 Wiley Periodicals,Inc. 525

526 BUCHHOLZ ET AL.

Contentious public characteristics are also present in many fields outside environmentaleconomics. While charita-

ble giving is regarded as a public good by altruistic donors, it is rejected by others emphasizing its potentially adverse

economic effects. In the context of foreign aid, prominent examples for such a critical attitude toward transfers are

Collier (2007) and Deaton (2013), who are afraid of deterioratingperformance incentives on the part of the recipients

in developing countries, waste of money through bad governance, and corruption of the ruling elites. But also arms

races between enemy countries (see, e.g., Bruce, 1990; Ihori, 2000) or lobbyism in support of opposing political goals

(see, e.g., Ihori & Kameda, 2015) can be interpreted from the perspective of contentious public characteristics.

In the presence of contentious public characteristics, the beneficiaries and the victims often have the possibility to

counteract each other: While the beneficiaries, as “augmenters” of the public characteristic, can increase the level of

the public characteristic (and have an incentive to do so), the victims, as “depleters”of the public characteristic, can

reduce it through countervailing measures. An example of such opposing activities appears in the context of climate

change. Whereas the countries that benefit from a lower global temperature mayabate greenhouse gas emissions, the

countries which are negatively affected by mitigation measures might instead purposefully increase greenhouse gas

emissions or conduct geo-engineering1(for example, through albedo modification) in order to increase global temper-

ature. Other examples are obviouslygiven by arms races and lobbying activities.

In economic theory,the simultaneous occurrence of public characteristics that are beneficial for some and adverse

for others has only been treated in quite specific settings until now (Ihori, 2000; Ihori & Kameda, 2015), that is, by

assuming Cobb–Douglas preferences for the agents involved. Using the ideas of the aggregative game approach as

conceived by Cornes and Hartley (2007), it becomes possible to generalize in a straightforward way some of the

already known results and, more importantly, to infer new effects for contentious characteristics which can be aug-

mented by one group and depleted by another. Such an analysis will be conducted in this paper, whose structure

will be as follows. After presenting the theoretical setting2in Section 2, we describe in Section 3 the noncoopera-

tive Nash equilibria of voluntary provision of the contentious public characteristics. By taking up a central issue in

public good theory, the effects of income changes and income redistribution on these Nash equilibria are analyzed in

Section 4, which in particular leads to some novel neutrality results with respect to increases of income. Extending

some findings of Ihori (2000) and Ihori and Kameda (2015), preference changes and coalition formation then are con-

sidered in Section 5. In Section 6, we establish a paradoxical effect caused by improvementsof the victims’ depleting

technology,which results in utility losses for both the augmenters and the depleters. Some of the effects which arise in

case of contentious public characteristics are illustrated by exampleswith Cobb–Douglas preferences in Section 7. In

Section 8 we describe the Pareto-optimal solutions and compare their welfare properties to those of the Nash equilib-

rium. This also enables us to identify some problems of international cooperation in the presence of contentiousness

of public characteristics. In Section 9 we conclude and hint at some possible extensionof the analysis.

2THE MODEL FRAMEWORK

We assume that there are two groups Iand Jof agents which either benefit or suffer from the aggregate level Gof a

public characteristics PC.

GroupI(o f size m) contains the PC beneficiaries. Each agent i∈Iis characterized by his initial endowment (“income”)

wI

iand his utility function is uI

i(cI

i,G), which is defined for all private consumption levels cI

i≥0ofagentiand all G≥0

and has the standard properties, that is, it is twice differentiable, quasi-concave and strictly positive increasing both

in cI

iand G(which indicates that Gis a public good for each agent i∈I). Then indifference curves in a cI

i-G-diagram are

downward sloping and convex(see Figure 1).

1SeeSandler (2018) for a characterization of different geo-engineering approaches and their game-theoretic analysis.

2Unlikeother recent papers on public good theory (see, e.g., Barbieri & Malueg, 2016; Caplan, 2016; Maldonado & Rodrigues-Neto, 2016), complete certainty

andfull information are assumed in our model.