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• Foreword
• Preface
• Acknowlegments
• Cost and Choice
• 1.: Cost In Economic Theory
• Classical Economics
• Marginal-utility Economics
• The Marshallian Synthesis
• Frank Knight and American Neoclassical Paradigms
• 2.: The Origins and Development of a London Tradition
• Wicksteed and the Calculus of Choice
• H. J. Davenport
• Knight On Cost As Valuation
• Robbins, 1934
• Mises, Robbins, and Hayek On Calculation In a Socialist Economy
• Hayek, Mises, and Subjectivist Economics
• The Practical Relevance of Opportunity Cost: Coase, 1938
• G. F. Thirlby and “the Ruler”
• Mises’ Human Action
• The Death of a Tradition?
• Appendix to Chapter 2: Shackle On Decision
• 3.: Cost and Choice
• The Predictive Science of Economics
• Cost In the Predictive Theory
• Cost In a Theory of Choice
• Choice-influencing and Choice-influenced Cost
• Opportunity Cost and Real Cost
• The Subjectivity of Sunk Costs
• Cost and Equilibrium
• 4.: The Cost of Public Goods
• The Theory of Tax Incidence
• Costs and Fiscal Decision-making: the Democratic Model
• Costs and Decision-making: the Authoritarian Model
• Costs and Decision-making: Mixed Models
• The Choice Among Projects
• The Costs of Debt-financed Public Goods
• Ricardo’s Equivalence Theorem
• Tax Capitalization
• 5.: Private and Social Cost
• Summary Analysis
• A Closer Look
• Internal Costs, Equilibrium, and Quasi-rents
• An Illustrative Example
• Pigovian Economics and Christian Ethics
• Narrow Self-interest and Alternative-opportunity Quasi-rents
• Conclusion
• 6.: Cost Without Markets
• Prices, Costs, and Market Equilibrium
• Resource-service Prices As Final-product Costs
• Market Equilibrium, Costs, and Quasi-rents
• The Cost of Military Manpower: an Example
• The Cost of Crime: Another Example
• Artificial Choice-making
• Socialist Calculation and Socialist Choice
• Costs In Bureaucratic Choice

Costs and Fiscal Decision-Making: The Democratic Model

What are the “costs” of public goods in the genuine opportunity-cost, or choice-influencing, sense? This question itself ties costs directly to choice and immediately requires some identification of the choosing agent. The connection between the political decision structure and public finance cannot be avoided. Traditional incidence theory is presumed useful in providing bases for better informed choices of tax instruments. But it is not possible to discuss these choices without identifying the choice-maker. Who decides? The answer depends on the way in which political decisions get made. This is obvious enough, but what is so often overlooked is that “costs” vary significantly over the many different decision structures.

Let us consider first a simplified collective-decision model, which we can associate with de Viti de Marco. Here the individual who makes the fiscal decision is both the prospective consumer-beneficiary of public goods and the prospective taxpayer. This model has been variously called “individualistic,” “cooperative,” and “democratic” by different scholars. The great advantage of this model is that the choice within it closely resembles that made by the individual in his market behavior. He chooses to tax himself in order to secure the benefits of the public good. What does the individual forego in making a choice? In making a choice, the individual foregoes the possibility of avoiding the actual tax outlay; and consequently he foregoes the enjoyment of those goods which might have been purchased with this predicted outlay. The subjective value placed on these alternative goods is a relevant choice-influencing cost. This much seems apparent, but is there any reason for thinking that the money outlay, even if this could be accurately predicted, reflects the subjective barrier to the individual’s decision?

As our earlier analysis indicated, for this anticipated outlay to measure, even indirectly, the subjective cost, it must be assumed that no profit opportunities exist elsewhere in the economy, including the public sector. But there is an additional complication that must also be recognized, one that was mentioned earlier but not discussed in detail. Collective goods are not purchased individually. Each person cannot adjust his own desired purchases; all must accept the same outcome. At best, the tax side of a fiscal decision is a vector, the components of which represent the levies on each member of the group. Consider, then, the decision calculus of the person who participates in such “democratic” fiscal choice. He “votes for” an outlay on a public good that is to be shared by all members of the community. What are the costs that will influence this choice? What are the genuinely foregone alternatives that he rejects? By not approving the proposed budgetary outlay, the individual’s own tax outlay can be avoided, and, under the rigidly restrictive assumptions about the absence of profits elsewhere, this anticipated outlay can be taken to reflect indirectly at least one part of cost. In rejecting the budgetary proposal, however, the individual also avoids, or chooses to avoid, all other consequences of the collective decision. On the cost side, these anticipated consequences are the tax payments made by others than the particular individual whose choice we are examining. If he positively evaluates the foregone enjoyments that others might purchase with these outlays, some cost element emerges. Choice-influencing cost as an obstacle to the individual’s approval of a public-goods decision can be measured by his own expected share in the tax payments only in the extreme case where he places no value at all on the relief of others from “suffering.”

If this applies for one participant in a group choice, it must apply to all. Hence, the total tax payment that is anticipated, measured in money terms, may be a grossly inaccurate estimate of the “social” cost of the budgetary outlay that is considered. The choice-influencing cost to each participant, and hence to all participants in some additive sense, may far exceed the estimate produced by the simple summation of individual shares.

This does not imply that the group-decision aspects are limited to the cost side. For precisely the same reasons, the individual will reckon the prospective benefits from a proposed public-goods outlay to include not only those that he expects to secure privately and individually, but also the value that he places on the anticipated benefits flows to others as their share in the commonly consumed good. Just as with the cost side, any measure of anticipated benefits derived from a simple summation of separate shares is likely to be grossly in error.

A recognition of these points suggests the limited relevance of modern cost-benefit analysis, which seems aimed at providing some measures of genuine “social” costs and benefits from proposed projects. The assumption that anticipated costs, as measured, will equal anticipated benefits, as measured, implies that the group should somehow be on a margin of indifference in its collective or “social” choice for or against the project. As we have demonstrated, however, there is not the remotest reason for making any such inference, even apart from the important distributional issues that have not yet been raised at all. If the proposed tax should be levied equally on all persons and the proposed benefits shared equally, there would still be no presumption that a measured cost-benefit ratio of unity should imply indifference in group-choice.