BENEFIT-COST ANALYSIS AND DEMAND CURVES FOR PUBLIC GOODS

This paper starts by examining why demand curves are not as useful in the analysis of public as of private goods. It is argued that the ‘quantity’ of most public goods amounts to what is usually called a ‘quality’ measure. Because of this, and for other reasons developed in the paper, it is fruitful in the analysis of public goods to deal directly with the total amount individuals would pay for changes in public good provision, rather than with the average amount per unit change. A demand curve-like construction, dubbed an ‘aggregate bid curve’, is shown to be a useful tool. The aggregate bid is the precise meaning of ‘benefit’ in benefit cost analysis. It is conjectured that, under certain assumptions, all of the conditions of efficiency, with and without public goods and externalities, can be derived using aggregate bid curves.