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«János Seregi, Zsuzsanna Lelovics and László Balogh Working Paper No. 87 October 2012 b B A M B AMBERG E CONOMIC R ESEARCH GROUP k k* BERG Working ...»

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The social welfare function of forests

in the light of the theory of public goods

János Seregi, Zsuzsanna Lelovics and László Balogh

Working Paper No. 87

October 2012











BERG Working Paper Series

Bamberg Economic Research Group Bamberg University Feldkirchenstraße 21 D-96052 Bamberg Telefax: (0951) 863 5547 Telephone: (0951) 863 2687 felix.stuebben@uni-bamberg.de http://www.uni-bamberg.de/vwl/forschung/berg/ ISBN 978-3-943153-01-9


Dr. Felix Stübben  felix.stuebben@uni-bamberg.de The social welfare function of forests in the light of the theory of public goods János SEREGI, Zsuzsanna LELOVICS and László BALOGH Kaposvár University, Kaposvár, Hungary H-7400 Kaposvár, Guba Sándor 40.

E-mail: seregi.janos2@mail.ke.hu Abstract Differentiation between public and private goods is very complex and difficult. In this article, authors overview these definitions and also the theories about private and public goods to apply this knowledge in the determination of the social welfare functions of forests, the utilization and the tasks of the government. The welfare functions of forests, the tasks of the owner and also the way of utilization of the forest is differing between public and private forests. This overview can help to determine these functions and tasks and also find the best ways of utilization.

Keywords: Social welfare, Private and public goods, Government

1. Introduction While we studying the social welfare functions of forests, we regularly have to face with questions that economically difficult to consider. In case of private forests, the owner or user information, individual preferences, short and long-term economic interests will help a lot in the choice of the forest utilization, and also in the combination of different possibilities that do not exclude each other. In case of forests owned or used by the state the situation is basically different, because besides the economical criteria of forest utilization other macro economic and social factors have to be considered.

These include for example the protection of natural environment, national wealth and national values, protection of historical relics, the role of tourism in preservation of health, the love of nature and also the education of patriotism or just the increase of people’s happiness and well-being without the measurable increase of GDP. It can be an important task to involve the public goods of private forests (for example blue hiking trail, a part in private forest) in free of charge with the help of the state.

It does not offer solution for the above mentioned problem, but it helps to understand it if we overview the theoretical definition of the economic characteristics of certain goods (particularly the public goods). We reviewed some important steps of reference systems in the history of economical theories and also how they can support the making of optimal social decisions. Finally, we return to the starting point and look over how they are applicable in the economical award of social welfare utilization of the forests.

2. Theories about the distinction of private and public goods The distinction between private and public goods is a substantive issue in the terms of establishing the extent and budged of the government involvement. If we can decide irrefutably that something is private or public good, the necessity of state or non-state implementation can be clearly assigned. The question is actually occurs in transition states: how government participates in the establishment of these? (Of course, we are aware that to answer this and also the actual construction, never withdrawal from the rights required in the past, can be a barrier of clear economic—rational—consideration.) Review the historical alternation of the definition of public good (Blankart, 2011).

Already SAX from the late Kameralists, draw attention to appropriate the ruler’s incomes to revive (also) economy. At the beginning 20th century MAZZOLA and WICKSELL thought the goodness of public good if it was available for someone, it was also available for everyone. However WICKSELL draw attention to the annoying stowaway behavior that is an optimal strategy individually but it occurs as a problem at the social level. The solution would be that all the affected sit down and decided to put up the money together. LINDAHL (1919) examined how to finance the production of public goods from optimal tax. The most people refer to the definitions that SAMUELSON (1954) (Samuelson, 1954) and MUSGRAVE (1959) used, later we will describe the categories that they used. BUCHANAN (1968) brought change, he regarded important the examination of the manners of common-pool resources. His innovation was considering the public consumption of public goods, not like the previous approaches that classified the goods according to features (rivalry, excludability). MALINVAUD and DRÊZE (1970–

1971) observed the classification according to the features, but basically make a distinction between rivalries; excludability was only a secondary element. JOHANSEN (1971), CLARKE and GROVES (1971–1973) applied a decision theory approach (Blankart, 2011). In the Hungarian literature STIGLITZ (2000) (Stiglitz, 2000) és VÍGVÁRI (2002) (Vígvári, 2002) had similar statements about the definition of public goods.

Classification of goods along two dimensions by BLANKART (2001); according to MUSGRAVE (1973) Figure 1.

–  –  –

To do this classification of certain goods, the decision should be made clearly, for example it is characterized by excludability or not, it cannot be said that a „bit” excludable. However, for a more analytical work quantifiability—a real scale—needed.

The tool of measurement can be the marginal cost of the exclude of a non-paying consumer (stowaway) or include of a new consumer. If the previous is high exclusion is impossible, if the latter is higher we talk about rivalry. It should be emphasized that exclusion always means technical exclusion (for example not moral exclusion). The only exception is cost-based impracticability, because the costs of it exceeded the deficits of stowaway behavior.

Rivalry can be explained by the features of the certain good. It reduces the usefulness of eat an apple if someone eat from that previously, whilst listening to the radio is an experience and will not change if someone else listen it, too. Of course, sometimes certain facilities or a certain cultural situation determines the occurrence of competition.

When we brush our teeth with a toothbrush we do not like to give it to another person, but if we clean our shoes with it, give it to other family members does not mean a problem. For a Hungarian woman monogamy is natural, but in the earlier Mormon world “husband consumption” between wives did not rival.

In MUSGRAVE approach state does not related to private goods (1), the „invisible hand” serves perfectly in their markets, government should not interfere (Musgrave, 1996). Pure public goods (4) (like national defense, flood control, environmental protection, protection of private properties, etc. that benefits for all) in fact relates to the state, almost it has obligate rights and it has to provide it. Private production can work in a non-profit form or in a very small community (see 1). The other two elements (2 and 3) of the table, the degree of intervention is a determinative question, need consideration of the effects of market and government failures. Public goods (2) include fishing (though the fact that the boundaries of international waters in the shoreline farther tighten, the degree of exclusion can be increased the coastal countries).

Downtown streets also belong to the category of public goods, because no one can be excluded, but the drivers competing with each other for parking space. In “toll” goods (3) exclusion give space for payment, besides when a motorway is not crowded cars do not bother each other, and also does not mean a problem that more people watch the television at home.

ZIMMERMANN and HENKE form groups in one dimension, which creates the applicability of simple function analysis (Zimmermann and Henke, 2005). They make a distinction between private and public goods along rivalry (in intermediate state we can speak about mixed goods), in these categories they make distinction according to exclusion (still technical and cost-based) (Figure 2).

–  –  –

Figure 2 Degree of rivalry with the subordination of excludability If vaccines are not mandatory, exclusion is made by only those people get it who voluntary go to the doctor. At the same time, if the majority vaccinate themselves to a communicable disease, the non-vaccinated also protected, because the risk of infections become lower, in this way they cannot be excluded from this major protection.

Lighthouse is a typical good example for pure public goods, because if it helps to a ship in orientation, it would not be less helpful for another or not available, it cannot light for just one of them.

CANSIER and BAYER according to Table 1 create groups in a one dimension scale (Cansier and Bayer, 2003).

–  –  –

The quasi (also called practical) private goods include the private goods that have external effects. For example, when an old diesel car passes in front of someone he cannot exclude himself from its discomfort. Of course, not all effects are bad: when a teacher pays for a PowerPoint course he cannot exclude the students from the positive effects of it. Club goods are quasi-private goods that have the possibility of exclusion, but there is no rivalry in consumption (till the membership does not reach an extremly high level). For example, fishing is a quasi-public good such as a community resource.

In pure public goods we have to differentiate produced and natural public goods. Clean air belongs to the latter category, but if pollution takes the level when cleaning is necessary it becomes a produced public good.

BUCHANAN (1968) examined that consumption is private or public (Cullis and Jones, 1998). (The problem with this approach is that it does not answer for the question to produce the good individually or commonly.) He examined two dimensions. One of them is divisibility; the other is the size of the consuming group. Private good is consumed individually (in a very small group), everybody has an own part. For example, fire-extinguisher in the hall is a partly divisible good, can be consumed in small groups (2). Not everyone needs an own fire-extinguisher till the rush does not endanger the fire-fighting. Swimming pool is an example for indivisibility (4) that we use individually, but do not parcel it to decide which square is whose. Moderately divisible and crowds of people can avail (3) for example vaccine (not everyone avails it, but it protects also the others). Pure public goods (5) are indivisible and large groups can consume them.

Figure 3 Division of consumption

Figure 4 and 5 show the demand of private and public goods (according to Cullis and Jones, 1998; and Musgrave, 1996). Da and Db mark the demand of ’a’ and ’b’ people’s demand for a certain private good, Da + b is the total demand (Da and Db is the horizontal amount). Da’ and Db’ show ’a’ and ’b’ people’s marginal propensity to pay for a certain public good, Da + b’ is the vertical amount of them. The optimum is Da + b = MC and Da + b’ = MC.

Figure 4 Total demand: public decisions and private goods

The next figure is the same with the previous, the only difference is that LINDAHL marked the marginal propensity to pay for public goods with D, the marginal costs with MC. The effective point (Teff, peff) of public good production, and everyone has to pay the amount of tax that is equal with his D besides the amount of Teff (in the figure it is pA and pB). The problem with the establishment of theoretical balance in practice is that we do not know the preferences of certain people and if we ask them they may be say lower D to pay lower tax while they use public goods according to their real needs.

Figure 5 The balanced amount of public goods in case of LINDAHL-tax

PARETO, KALDOR and HICKS also searched for the balanced solution, they assumed a horizontal MC that is usually the same as the price in the optimum. Since we cannot divide fairly the costs, simply pay the goods fifty-fifty with the two performers. At this time according to the KALDOR–HICKS criteria, when the balance point is the same as LINDAHL, ’A’ comes off badly, because besides Teff he pays higher tax than his willingness. ’B’ get in the right position because he would be willing to pay more than he has to. Under PARETO-criteria produce the amount of TA besides appropriate tax, so

the total revenue tariff will be p × TA. (This satisfies the conditions of PARETO-efficacy:

no one can improve the situation of someone without worsen the situation of someone else.) The following figure shows these two solutions.

Figure 6 The balanced amount of public goods in case of lump-sum tax Finally, have a look at what will be the overall balance in the production of private and public goods (Cansier and Bayer, 2003). In our model, we examined a binominal society (’A’ and ’B’ people), one kind of public (T) and one kind of private goods (X).

Suppose that ’B’ person’s welfare level is given by IB indifference curve. The concave curve from the figure above shows the limit opportunities of the production of T and X goods, minus IB we get the cd curve in the figure below. Since the usefulness of ’B’ is fixed, we get the balance point with the optimization of the position of ’A’ that will be in the tangent point of the residual curve and the IA indifference curve. Here we produce public goods in ’M’ (they both consume it, because there is no rivalry), besides this we can produce ’N’ amount of private goods (Figure 5). From this ’N’ unit ’F’ remains for ’B’ (figure above) and remains ’E’ for ’A’ (Figure 6), because of the derivation of cd, it is true that: N = E + F.

Figure 7 Effective production of private and public goods

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