Welfare Reform with Alternatives

        The private sector is not making high-quality community health systems available due to the externalities that are associated with providing these services. These externalities decrease demand and to make this service available the public sector should intervene. These externalities create efficiency problems and the individual consumer’s marginal benefit does not equal society’s benefit.  If external costs are created then the producer or consumer underestimates the social cost and choose too many services from the society’s viewpoint. Also if production generates benefits for others that are not considered, then they underestimate social benefits and do not provide enough services. Some methods for the public sector to intervene are by contracting out to subsidize private companies, to finance through a property tax, or putting the issue to a vote. In this essay I will evaluate each one to determine the best outcome.

It would be appropriate for the state to be the right level of government to intervene by providing a federal funding program where the government contracts out to subsidize private companies. This would make services affordable and government would pay for the gap between social marginal benefit and private marginal benefit. Currently services are under demanded because they don’t see full benefits in providing this service. By subsidizing, the demand moves to where it needs to be and the inefficiencies caused by the external benefits are corrected to the efficient amount. In the graph below it indicates that if marginal costs are reduced to P*-S by a subsidy of $S per unit, then the consumer is convinced to choose consumption level Q*. Therefore, the externalities has been eliminated, and the private market choice of the consumer is efficient.

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If the state choices to intervene to provide some community health programs but does not want to subsidize, another alternative is to finance through a property tax administered by the State.  This would be reasonable if the state controlled the finances and were responsible to collect the taxes and the local level would deliver the services. The local level would be funded equally through the taxes the state collects and there would be a stronger tax-benefit linkage to provide equity and efficiency. The issue with this method is that there are cost associated and taxes that are used to generate revenue may alter behavior and create inefficiency.  If state cannot decide on intervention method they can turn to fiscal federalism.

In fiscal federalism the policy-makers put the issue to a vote, needing majority of the votes to decide, they will use direct democracy. With direct democracy there will be an issue that the outcome may depend on the political characteristics of the government and citizen preferences will not be single peaked. Due to issue of agenda setting and not having single peaked preferences, the results will not aggregate preferences and will not be preferences of the majority of the voters. The majority vote might be selected not because it was the most preferred but because it was the only choice that could receive majority support. There will be no clear cut choice or it will be different depending on the order in which the choices are considered. Since there is no single peak preferences the voting choice could move to representative democracy where voters elect a representative who then selects choice of the median voter. These votes can be represented along a continuum but voters have to act on their true preferences for the majority vote to fall at the median. The issue with this option is the possibility of lobbying and dissatisfaction among taxpayers since there is no guaranteed outcome of their preferences. Another alternative would be through bureaucracy where they attempt to maximize their own preferences and try to voters to elect their choices.  They might be able to accomplish this if they have more experience or more information than the voters. This will then cause an issue of asymmetry of information for the population and oversupply of bureaucracy.