Consumer Preferences, Citizen Preferences, and the Provision of Public Goods
30 Pages Posted: 11 Mar 2008
A standard justification for state intervention and regulation is the market failure known as public goods. Assuming the private market cannot appropriately react to the true demand for public goods, the regulator must decide which goods to supply and in what quantity. A regulator wishing to base these decisions on people's preferences faces the difficulty of apparent differences, or even conflicts, between the preferences people reveal in their private life and those they express in the public sphere. For example, in day-to-day life, individuals frequently litter and pollute wilderness areas. Yet, when elections take place, they vote for stringent laws protecting the natural environment. Various theories have attempted to explain this phenomenon. One theory claims that individuals hold different preferences in their consumer role than in their citizen role. While the former role, evoked in market settings, reflects people's self-regarding interests, the latter, aroused in political settings, reflects their values and beliefs regarding the good of society as a whole. Another, widely accepted theory assumes that individuals' most favored preference is to free ride whenever possible. Thus, a Prisoner's Dilemma type of problem accounts for the discrepancy between consumer and citizen behavior. This article critically analyzes these and other explanations, as well as their normative implications, and proposes an alternative theory. It rejects the claim that consumers and citizens hold radically distinct preference orderings, arguing instead that to a great extent, individuals' preferences concerning public goods are other-regarding. The lower manifestation of these preferences in daily life can be explained by an Assurance Game model. Consumer behavior is largely due to the perceived implausibility of realizing one's highest-ranking collective goals in market settings. In many cases, success can be achieved only in the political arena. Therefore, citizen preferences should be accorded substantial weight in social regulation. However, since this theory does not rest on degradation of consumer preferences, careful use of market tools - such as cost-benefit analysis - may be warranted.
Keywords: public goods, preferences, regulation, game theory, behavioral studies, prisoner's dilemma, chicken game, assurance game, cost-benefit analysis
JEL Classification: A13, C71, C72, D61, H41, K20, K32
Suggested Citation: Suggested Citation