Chapter 60: Welfare Economics
Mark Blaug The arts are subsidized to some extent in every country in the world and yet the standard tools of welfare economics do not readily provide convincing arguments for public funding of the arts. Typically, economists base a case for public subsidies of a sector or industry on the existence of ‘market failure’, meaning a violation of one or more of the conditions for competitive efficiency. The most frequently cited examples of market failure are (1) ‘externalities’ or ‘spillovers’, whether of production or of consumption; (2) ‘economies of scale’, such that unit costs fall as output increases; (3) ‘public goods’, that is goods that are non-rivalrous in consumption and non-excludable in their benefits; and (4) endemic consumer ignorance about technically complex goods as, for example, the demand for healthcare. When it comes to the arts, however, these are frequently supplemented by special arguments about (1) ‘equality of opportunity’, according to which cultural goods are necessarily ‘experience goods’, that is, goods that are demanded only by those who have inadvertently experienced them; and (2) the ‘option value’ of a cultural heritage maintained at public expense across the generations; and (3) the straightforward, selfdemonstrable ‘merit’ of the arts independent of any instrumental value (see Baumol, Chapter 1 in the present volume). It does appear, therefore, that we need something more than standard welfare economics if we are going to talk meaningfully about an economic rationale for public funding of the arts. I label this ‘something more’ Pigovian welfare economics to distinguish...
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