Review 7: Public Goods and Private Communities: The Market Provision of Social Services, by Fred Foldvary (1994)

Ulbrich, Holley H.,
Clemson University,
Amer.J. Agr. Econ., (May 1996)

This volume combines a theoretical explanation for successful private provision of shared goods (not social services, as the title promises) with case studies of actual provision by proprietary communities ranging from Disney World to condo associations to planned communities. In both the model and the cases, the shared goods are territorial in nature, the type generally provided by local governments – open space, street lights, solid waste collection, recreational facilities, etc. In general, the case studies are more informative and original than the theory, which creates a straw man of traditional public goods theory that is allowed to slowly twist in the wind before being hanged, quartered, and burned for good measure.

The straw man is that public goods will not be provided by any other arrangement but compulsory taxation through government because of the free-rider problem. Yet most widely cited models of public provision, the Samuelson and Lindahl models, do not imply nonprovision, just less than optimal provision. These models also imply that the degree of suboptimality will depend on certain characteristics of the good in question; in general, local public goods are much less vulnerable to free-rising than those that are less territorial. Thus, the “proof” in each of Foldvary’s case studies that local public goods are in fact successfully provided through contractual arrangements and financed in many cases by site rents merely contradicts a hypothesis that has little, if any, currency, particularly for shared goods that are territorial in nature.

With this caveat, there is much of interest in this small volume. There are some useful extensions and integrations of taxonomy that help to counter a tendency to occasional sloppiness in thinking about public goods, a carelessness that results in part from not giving concrete embodiment to the kinds of public goods being modeled. There is a useful discussion of the work of Heath and McCallum on proprietary communities as diverse as resident community associations, hotels, and even shopping malls. There is an excellent discussion of the role of territorial site rents as a payments mechanism. And the cases – Disney World, a condominium association, two planned communities, and some private provision of shared services in St. Louis – are a most useful addition to the stories economists tell.

But the case that Foldvary attempts to make for proprietary over sovereign provision of local public goods is not compelling, and it fails to address some important concerns. How applicable is contractual provision of shred services in an established community rather than a newly created one? What happens to those who are excluded from these proprietary communities by the cost of both private housing and shared amenities? Which shared services are successfully provided, and which still require local government? (Most of his cases still rely on local government for certain services.) Do proprietary communities represent a case of “skimming,” taking the most attractive residents and the most easily provided services and leaving the difficult cases for local government? In what sense is the ability to modify an unsatisfactory contract different from the town meeting or the ability to vote out of office those whose management is unsatisfactory? Are not the options of voice and exit equally effective mechanisms in the local public sector as they are in residential associations or other forms of proprietary governance? How fundamental are the differences between funding shared services by a mix of condo association dues and site rents in the private case, and funding those same services by property taxes and municipal fees in the public case?

There is clearly a strong trend toward proprietary communities of many kinds – retirement communities, gated residential communities, condominium associations – all representing proprietary governance that either replaces or supplements the services of the local public sector. Much more work is needed to understand the implications of this trend for the provision and financing of local public services. Despite its flaws, Foldvary’s contribution raises some provocative issues and offers some insights into how we provide shared goods and services in a variety of nontraditional settings.