States as Providers of Public Goods: How Does Government Size Affect Environmental Quality?

Abstract

Theories explaining government size and its consequences are of two varieties. The first portrays government as a provider of public goods and a corrector of externalities. The second includes theories on bureaucracy and interest groups. One key difference is that an expansion in government size is unambiguously associated with an increase in social welfare only in theories of the former variety. As to the latter variety, the association between government size and public goods provision (or social welfare) is either negative or ambiguous. We study the empirical significance of these competing claims by examining the relationship between government size and environmental quality (notably, air quality measured by SO2 concentrations) for 42 countries over the period 1971-96. We find that the relationship is negative. This result does not prove conclusively that government size expansion has been driven by factors other than concern for the public good. But it supports a presumption against the theory of government size that emphasizes public good provision.

Keywords: Government size, public expenditure, public goods, corruption, environmental quality