Choosing public versus private provision of cultural goods

It has been argued that there are some goods which should not be supplied according to market principles. Cultural goods, in most cases, have characteristics of public goods, particularly when completely free and open to the public (as is the case with monuments and public art), and in other cases cultural goods generate significant positive externalities. Defenders of public funding for music, visual arts, etc. claim that the nature of cultural goods makes market distribution particularly inappropriate. The social benefits of engaging with culture cannot be quantified and to even think about quantifying or describing them in terms of benefits is to miss their essential nature.

According to the standard theory of public goods, the market mechanism cannot efficiently supply this kind of goods. The non-excludability of the public goods prevents its voluntary funding, its supply cannot be based on voluntary exchange but in governmental compulsory exactions. However, in contrast with the previous conclusion, we actually find numerous non-public institutions supplying a wide range of public and quasi-public goods.

Two main arguments can explain the emergence of private non-profit institutions supplying some collective goods: the unsatisfied demand and the private consumer model. However, these models do not explain the significant differences in the size and the role of the non-profit sectors among countries with a similar level of economic development (e.g. why in Sweden the public sector expenditures represent 70 % of total provision of public cultural services versus a 30 % of non-profit institutions expenditures, while in USA public sector represents just 11 % compared to 89 % of non-profit institutions expenditures).

In this paper we put forward an economic model that is applicable to cultural goods, in which private voluntary provision of public goods is a real alternative to public provision. Assuming that ethical rules reduce free-riding behaviour, individuals choose between governmental or private voluntary provision as alternatives and determine the level of both governmental supply and voluntary supply of public goods. Voting in the political process determines public supply and individuals’ decisions on voluntary contributions determine the voluntary supply in a two stages repeated game. The model allows focusing not only on equilibrium states but also in the dynamic issues. The outcome depends on initial positions but also on the evolutionary path.  Institutional setting may explain the different paths taken by different communities. Initial condition, i.e. history, and behavioural rules matter.