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A Theory of Government Grants*

Published online by Cambridge University Press:  07 November 2014

Albert Breton
Albert Breton*
Affiliation:
University of Montreal and The Social Research Group
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Extract

Government grants in federal countries account for a small share of the national product of these countries. I suppose that this, and the fact that federal arrangements are relatively flexible, explains why no well-organized body of economic doctrine deals with the issues raised by the existence of these grants. In terms of general principles, I venture the opinion that the consensus among economists—though perhaps not among students of public administration—holds that these grants can be defended with ethical and distribution arguments, but that on grounds of efficiency (in the economist's sense) and resource allocation they are to be condemned. Further, I would guess that majority opinion would favour unconditional over conditional grants on the ground that the latter do not respect the sovereignty of the “consumer” or of the spender.

These principles seem to have been accepted and even defended by economists like Bhargava, Buchanan, and Scott and to have received the support of Dehem and Wolfe among others. Dissenters, like Buchanan—on the question of efficiency versus ethics—have dissented only in part.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 31 , Issue 2 , May 1965 , pp. 175 - 187
Copyright
Copyright © Canadian Political Science Association 1965

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Footnotes

*

This is a revised version of a paper read to the Thirty-Sixth Annual Meeting of the Canadian Political Science Association in June 1964. I am indebted to Harry G. Johnson, Anthony D. Scott, Pierre Trudeau, and Jack Wiseman who have read an earlier draft of the paper, made helpful comments and suggestions, and pointed out some errors. If errors still remain, they are of course mine.

References

1 Bhargava, R. N., “The Theory of Federal Finance,” Economic Journal, 03 1953, 84–7.CrossRefGoogle Scholar

2 Buchanan, J. M., “Federalism and Fiscal Equity,” American Economic Review, 09 1950.Google Scholar

3 Scott, A. D., “The Evaluation of Federal Grants,” Economica, 11 1952, 377–94.Google Scholar

4 Dehem, R. and Wolfe, J. N., “The Principles of Federal Finance and the Canadian Case,” this Journal, 02 1955.Google Scholar

5 Buchanan, J. M., “Federal Grants and Resource Allocation,” Journal of Political Economy, 06 1952, 208–17.CrossRefGoogle Scholar

6 Samuelson, P. A., “The Pure Theory of Public Expenditure,” Review of Economics and Statistics, 11 1954, 387–9Google Scholar; “A Diagrammatic Exposition of a Pure Theory of Public Expenditure,” ibid., Nov. 1955, 350–6. Musgrave, R. A., The Theory of Public Finance (New York, 1959), 6–15, 61–89.Google Scholar Strotz, R. H., “Two Propositions Related to Public Goods,” Review of Economics and Statistics, 11 1958, 329–31.Google Scholar Tiebout, C. M., “A Pure Theory of Local Expenditures,” Journal of Political Economy, 10 1956, 416–24CrossRefGoogle Scholar; “An Economic Theory of Fiscal Decentralization, in Public Finances: Needs, Sources and Utilization (Princeton, 1961), 79–96.Google Scholar

7 For an excellent discussion of the type of goods on which governments do (or should!) spend their incomes see Harriss, C. L., “Government Spending and Long-Run Economic Growth,” American Economic Review, 05 1956, 155–70.Google Scholar

8 “Pure Theory of Public Expenditure,” 387.

9 Tiebout, C. M. and Houston, D. B., “Metropolitan Finance Reconsidered: Budget Functions and Multi-Level Governments,” Review of Economics and Statistics, 11 1962, 412.Google Scholar

10 See Hoffman, F. S., “The Economic Analysis of Defence: Choice without Markets” American Economic Review, 05 1959, 368–76Google Scholar, for an argument that even national defence is not a pure public good.

11 If one does not distinguish between subjective and objective benefits it is not easy to understand the particular type of market failure which arises as a result of the existence of public goods.

12 Colm, G., “Comments on Samuelson's Theory of Public Finance,” Review of Economics and Statistics, 11 1956, 408–12.Google Scholar S. Enke, “More on the Misuse of Mathematics in Economics: A Rejoinder,” ibid., May 1955, 131–3. J. Margolis, “A Comment on the Pure Theory of Public Expenditure,” ibid., Nov. 1955, 347–9. Musgrave, , Theory of Public Finance, 6–15 Google Scholar; Samuelson, P. A., “Aspects of Public Expenditure Theories,” Review of Economics and Statistics, 11 1958, 332–8.Google Scholar

13 Tiebout, in “An Economic Theory of Fiscal Decentralization,” has studied this case at some length.

14 This organization need not, of course, be a government in the sense this word now has when it is applied to national governments. It could very well be an institution in which co-operative measures are developed between national governments.

15 Musgrave, Theory of Public Finance, chap. 1.

16 It seems to me that this is the case discussed by Buchanan, in “Federalism and Fiscal Equity” and also by Musgrave, and Buchanan, in Public Finances: Needs, Sources and Utilization, 116–29Google Scholar under the general heading of “equal treatment of equals,”

17 Johansen, L., “Some Notes on the Lindahl Theory of Determination of Public Expenditures, International Economic Review, 09 1963, 346–58.Google Scholar

18 I am grateful to David Winch for bringing this point to my attention.

19 There is a situation when this argument is not valid, but it is not an important one. If we assume symmetrically located jurisdictions consuming non-private goods with symmetrical spill-overs and if all the individuals have similar tastes, then the spill-overs cancel out so that the allocation of resources is Pareto optimal without any grants whatsoever. This case is discussed by Tiebout, in “An Economic Theory of Fiscal Decentralization,” in Public Finances, 92 Google Scholar, and B. Weisbrod commenting on Tiebout's paper, ibid., 131–2.

20 The foregoing is not presented as an argument to support the contention sometimes heard, that all matching grants should be conditional. Suppose that the members of a jurisdiction do not want a super-highway which is wanted by the members of two neighbouring jurisdictions. On the assumption that the highway must pass through the first jurisdiction, one way (not the only one) of bringing about an optimum allocation of resources is by devising a system of matching unconditional grants.

21 Tiebout, “A Pure Theory of Local Expenditures”; see also Samuelson's, comments on Tiebout's, paper in the Review of Economics and Statistics, 11 1958, 337–8.Google Scholar

22 The expression “balkanized system” was taken from Scott, A. D., “A Note on Grants in Federal Countries,” Economica, 11 1950, 416.Google Scholar