Public Interest Law: An Economic and Institutional Analysis

By Burton A. Weisbrod, Joel F. Handler and Neil K. Komesar

What is public interest law? How effective is it? What are the limits to litigation as a mechanism for conflict resolution? In this study, economists, lawyers, and sociologists evaluate an institutional form that is new to American society and, indeed, to the world--the public interest law (PIL) organization. The book introduces the reader to the structure, resources, and activities of this "nonprofit industry," and also to the factors that affect PIL firms in their choices of cases and methods of handling them. The authors examine PIL's vast range of contemporary public policy concerns. These incude such general topics as the environment, consumerism, housing, employment discrimination, medical care, occupational health and safety, education finance, and taxation. A number of base studies are presented, and a method for economic analysis and evaluation is introduced and applied. The study points to PIL's success in advocating under-represented interests, in winning courtroom decisions, and in translating legal victories into reallocations of resources. At the same time, it notes the bias of PIL towards test-case litigation, a propensity to focus on judicial victories rather than on real social change, and a tendency to use lawyers even when other types of professionals might be more effective. Many of these problems stem from uncertainty of funding and legal restrictions on "nonprofit" organizations. The result is a set of hurdles that distracts PIL firms from their principal goals.  The authors do not limit themselves to PIL, but comment on the effectiveness of legal instruments as devices for social change, and on the behavior of the voluntary nonprofit sector, a little-studied portion of the economy. The book presents a fresh approach to the study of both collective-type economic problems and institutional setting in which public interest law works. This title is part of UC Press's Voices Revived program, which commemorates University of California Press's mission to seek out and cultivate the brightest minds and give them voice, reach, and impact. Drawing on a backlist dating to 1893, Voices Revived makes high-quality, peer-reviewed scholarship accessible once again using print-on-demand technology. This title was originally published in 1978.

• Language: English
• Publisher: University of California Press
• Release date: Jul 28, 2023
• ISBN: 9780520310803

Burton A. Weisbrod

Burton A. Weisbrod is the Cardiss Collins Professor of Economics, Chair of IPR’s Program on Performance Measurement and Rewards, and IPR Fellow at Northwestern. Joel F. Handler is the Richard C. Maxwell Distinguished Professor of Law Emeritus at the University of California, Los Angeles. Neil K. Komesar is Professor of Law Emeritus at the University of Wisconsin, Madison.

Book preview

Public

Interest

Law

Burton A. Weisbrod, Study Director in collaboration with Joel F. Handler and Neil K. Komesar

Public Interest

Law

An Economic and Institutional Analysis

University of California Press

Berkeley, Los Angeles, London

University of California Press

Berkeley and Los Angeles, California

University of California Press, Ltd.

London, England

Copyright © 1978 by

The Regents of the University of California

ISBN 0-520-03355-8

Library of Congress Catalog Card Number: 76-48367

Printed in the United States of America

123456789

Contents 1

Contents 1

Preface

Foreword

Part I Introduction and Theoretic Analysis

Chapter One Introduction

Chapter Two Conceptual Perspective on the Public Interest: An Economic Analysis

Chapter Three Problems of Enhancing the Public Interest: Toward a Model of Governmental Failures

Chapter Four The Public Interest Law Industry

Chapter Five The Public Interest Law Firm: A Behavioral Analysis

Chapter Six What Might Public Interest Law Accomplish: Distributional Effects

Chapter Seven Environmental Defense, I: Introduction to Interest Group Advocacy in Complex Disputes

Chapter Eight Environmental Defense, II: Examining the Limits of Interest Group Advocacy in Complex Disputes

Chapter Nine Housing, Zoning, and the Public Interest

Chapter Ten Public Interest Law and Employment Discrimination

Chapter Eleven Occupational Safety and Health and the Public Interest

Chapter Twelve Public Interest Law Activities in Education

Chapter Thirteen The Medical Marketplace and Public Interest Law

Chapter Fourteen

Chapter Fifteen

Chapter Sixteen Non-Law Public Interest Advocacy: Advertising on Children’s Television

Chapter Seventeen Public Interest Law Activities Outside the U.S.A.

Chapter Eighteen Financing Public Interest Law: An Evaluation of Alternative Financing Arrangements

Chapter Nineteen Conclusions

Contributors Biographical Sketches

Table of Cases

Index

Preface

The term public interest law (PIL) is new to the language, as is the institution known as a public interest law firm. Within the last decade, the types of activities associated with Ralph Nader and his consumer organizations, with the Sierra Club and its environmental programs, and with a new institutional form embodied in law firms that characterize their activities as partly or wholly public interest law have proliferated. They draw ever-increasing attention in the general interest press and are the subject of specialized literary efforts as well. With the appearance of financial support from a number of private foundations, and more recently, with the official blessing of the American Bar Association, PIL activities have multiplied, as has talk about their future.

This study is an attempt to evaluate this new set of activities and its institutionalization in the public interest law firm. We seek to learn not whether particular lawyers or PIL firms have acted wisely, successfully, or efficiently, but rather whether such an institution is well suited to deal with specific problems. We regard it as axiomatic that there are always alternative ways for society to deal with its economic and other problems. We seek to cast light on the probable consequences and effectiveness of one set of alternatives — PIL activities — in general and in particular problem areas.

While many persons have authored or coauthored chapters in this study, and although economists, lawyers, and sociologists have all made contributions, this is not a collection of independent contributions set between a pair of multidisciplinary covers. The outline for the volume was developed after a year-long seminar that I directed and in which most of the contributors to this volume participated. The structure for each of the case-study chapters on public interest law in action, found in Part Two of this volume, was designed to reflect the concepts developed in the predominantly theoretic chapters of Part One, especially Chapter Two. The area-study chapters in Part Two reflect attempts to relate the experience of public interest law efforts in each area to a common evaluative framework. Each chapter was thus treated from the outset as a part of an integrated project, with careful attention in the initial conception of the chapter to its content and to how it would fit into the overall study. Moreover, every chapter was presented and discussed in at least one Project Seminar, and was critiqued in draft form by at least two of the three senior authors of this volume. If we have failed to produce a cohesive study, it was not for lack of effort.

Our work was supported by a grant from the Ford Foundation to Joel F. Handler and me. We cannot overemphasize, however, that we were entirely free to pursue our research wherever good scholarship required. We want to make it clear that we did not attempt to evaluate the efforts of any particular PIL group, whether it received Ford Foundation support or not; our work was broader — on PIL as an institution.

While I was Director of the study, Handler and Neil K. Komesar helped in making policy decisions as the project developed, shared in the critiquing of papers, and served as an unofficial board of directors, in addition to writing particular chapters.

When we began this study we set up a small outside advisory board of eminent people from a number of disciplines. We were fortunate to obtain the assistance of James M. Buchanan (economist); Lawrence M. Friedman (professor of law); Albert Jenner (attorney); Julius Margolis (economist); Gilbert Steiner (political scientist); Peter O. Steiner (economist); the late Joseph Weintraub (jurist); and Stanton Wheeler (sociologist). The group assembled semi-annually and met with project personnel to discuss the work in progress, to react to our plans for additional research, and to suggest alternative research approaches. Satisfying a diverse group of able and experienced persons from economics, political science, and sociology, in addition to an academic lawyer, a practicing attorney, and a jurist, provided a challenge to our ability to tackle problems from a number of research perspectives and to convey our findings with rigor and clarity. The diversity of our board, however, reflected the multiplicity of perspectives we believed were relevant and the multiple audiences we hoped our study would attract. The advisory board was indeed valuable to us.

The study also benefited from as fine a pair of staff assistants as any study director could imagine. Delores (Dee) Juszczak was Administrative Assistant, secretary, and Person Friday during most of the study. She managed arrangements with our advisory board, handled much of the manuscript typing for the mounting number of chapter drafts and redrafts, and assisted me in countless ways to cope with the budgetary, administrative, and management aspects of the Project.

Ellen Sward was Editorial Associate, a title that fails seriously to convey her vital role. She not only co-authored a chapter, but she critiqued most other chapters and handled the major task of final editorial revision and coordination. My debt to Ellen Sward and Dee Juszczak is great, and it is a pleasure to acknowledge it.

In short, the study has benefited, from beginning to end, from the efforts of many. I wish to thank the Ford Foundation for making this study possible. I also want to thank the authors, research assistants, Advisory Board members, and others whose combined efforts produced not only this volume but a study group and an associated intellectual atmosphere in which ideas germinated, struggled for survival, and on occasion blossomed.

Burton A. Weisbrod

Foreword

Standard economic theory and analysis have concentrated primarily on the workings of the private sector. Study of the public sector has been secondary and has centered on the impact of the government on the private sector — mainly the impact of taxes, but also the effects of debt and expenditures. Theoretical studies most often have been concerned with establishing criteria for justifying government intervention or the evaluation of government performance.

The dominant theme in discussions of government intervention has been that of market failure. It is generally presumed that under certain conditions the private sector will allocate resources efficiently, but that the market cannot always be depended upon to accomplish this end. Failure of the market may occur when increasing returns to scale inhibit competition, or when individual behavior produces externalities, that is, positive or negative effects on the welfare of others. Awareness of the externalities has become a major theme of modern politics, after having been neglected for too long. There is general agreement that the government should intervene to restore efficiency when the private sector cannot do so — for example, by increasing expenditures for pollution prevention or for national defense.

We have also come to think of government as the guardian of equity and the interests of future generations. Perceptions about the nature and extent of government’s responsibility for such matters differ sharply, of course; controversy in these realms can never be completely resolved. But few would now deny that the government has at least some responsibility for counteracting the market’s pressure at the bottom end of income distribution and for avoiding discrimination against particular groups.

At no time in history, however, has the correction of market failure been regarded as a government monopoly. What might be called the voluntary public sector has always played an important part, at least in Great Britain and the United States. Private charity was the only floor for the market-generated income distribution until government assumed responsibility in the 1930s. In the past, reform movements, frequently spear-headed by churches and synagogues, have helped correct the deficiencies of the market.

Private activity might be regarded as making up for government’s inaction. But in another sense much of it is specifically directed toward more general government failure, a concept parallel to that of private market failure. When private groups urge reform legislation, they are essentially seeking to repair government’s own deficiencies.

As government regulation on all levels has increased, a need has arisen for intermediaries between individuals seeking redress and the bureaucratic agencies. It is in this context that Burton Weisbrod and his collaborators have brought forth this monumental study. It concentrates on a particular example of voluntary activity — public interest law firms, which are concerned with the repair of market and government failures. Public interest law is a relatively new field, although the legal activities of the National Association for the Advancement of Colored People began as long ago as 1909 and the American Civil Liberties Union emerged in the early 1920s. But the number of public interest law firms burgeoned after 1960.

Weisbrod and his collaborators subject the public interest law industry to a thorough economic analysis — sympathetic but critical. They begin by detailing the fundamental principles of the public interest and the role of public interest law firms in achieving their goals. Law firms are then studied as though they were industrial organizations. This is followed by analyses of public interest law activities in eight different areas: environmental affairs, housing and zoning, employment discrimination, occupational safety and health, education, medical practice, consumer protection, and income taxation. Each study examines the degree to which the criteria of efficiency and equity are satisfied. The analysis is very far from mechanical, however; the concepts of efficiency and equity are flexibly interpreted for the individual cases, while an underlying unity is preserved. Various methods of analysis are used, including quantitative studies in tabular form, regression relationships, and case studies. The roles of particular institutional situations and the problems of financing also receive consideration.

The authors recognize that although litigation is the primary instrument of public interest law activity, it is by no means the only one. They

study the effects of publicity, lobbying and information dissemination as alternative and complementary routes to changing government policy. When there is indication that the outcome of some public interest activity has been deleterious, the authors do not hesitate to criticize.

Here is a rich body of materials to serve as the basis for improvements in both practice and theory, providing a challenge to the well-known free rider doctrine. This book shows that there are in fact private interests, though possibly of a nonconventional sort, in public interest activity, and that there is a public motivation for both individuals and foundations who have financed so much of the public interest law activity. We learn that the structure and activities of the public interest law industry do not differ greatly from the private sector. The similarities and differences suggest the potential for fruitful theorizing.

Kenneth J. Arrow

Part I

Introduction and Theoretic Analysis

Chapter One

Introduction

Burton A. Weisbrod

The struggle to solve social and economic problems is never-ending. It is in part a process of discovery, of recognition that particular problems exist; it is in part a process of redefinition, of deciding that some particular conditions constitute a problem; and it is in part a process of invention, of the development of new mechanisms, instruments, and institutions for dealing with problems once they have been discovered or recognized. This book is an attempt to understand and assess the role of one recent, and still fledgling, institutional innovation, public interest law, and the public interest law firm.

The economics literature on the behavior of the private, for-profit sector recognizes the existence of conditions under which a decentralized private market cannot be expected to allocate resources efficiently — that is, to their most valuable uses. In addition to such allocative-efficiency failures, distributional equity failures of the for-profit market are also likely. That is, the distribution of income, wealth, and access to opportunity that result from the private market may not be judged socially satisfactory.

In the face of evidence and theoretic analyses pointing up the limits on the effectiveness of the decentralized private for-profit system, contemporary economic theory focuses attention on the institutions of government. Government can regulate, provide subsidies, levy taxes, and become a producer itself, in order to alter the market’s production of goods and services. Thus at least in theory, the allocative-efficiency failures of the private market are correctable. Similarly, if a social consensus is reached that there is too much (or too little) inequality of income or opportunity, government can use its power of compulsion to tax and to transfer money or services, and to affect the distribution of economic well-being in other ways.

Just as there are limits to what can be expected from the institution of the private market, there are also limits to what can be expected from the institution of government. No single institutional form is without handicaps and constraints. The search therefore continues for solutions to complex social problems, including means for enhancing the allocative efficiency of the economy and the equity with which it functions. Still other forms of institutions are sought for complementing the successes and correcting the failures of the private market and governmental mechanisms.

The voluntary non-profit sector constitutes another class of organizations which may have a useful role to perform. Organizations in this little-studied sector are subject neither to the direct political pressures acting on governments nor to the profit pressures of the private sector of the economy, although they surely confront other pressures and limitations.

It is within this multi-sector context that we examine public interest law activities and that recent social invention, the public interest law firm. We seek to learn whether this type of non-profit institution — organized and financed as it is, doing the types of things it is doing, using the particular law-oriented instruments that it uses — should be expected to be a useful part in a pluralistic system for dealing with inefficiency and inequity. Subsequently we examine a wide variety of actual activities of these public interest law organizations and attempt to evaluate not only their actual accomplishments but also their prospects.

To summarize, our overall perspective is as follows. No single mechanism is capable of dealing effectively with the manifold social problems encompassed by the concepts of allocative efficiency and distributional equity. The private marketplace and the institutions of government have capabilities for contributing to society’s efficiency and equity goals, but they also face limitations. Institutions within the private (voluntary) non-profit sector, combining some characteristics of each of the other two sectors, also can contribute, but they, too, confront limitations. In this book we examine a recent institutional innovation within the non-profit sector in order to broaden understanding of interactions among social-economic institutions, and to assess the current and prospective consequences of this new institutional form.

The conceptual framework of our analysis is fundamentally that of an economist, even though authors of a number of the applied chapters are lawyers or sociologists. Our economic perspective, however, is a broad one, encompassing a wide range of social goals. Nevertheless, were this study given the orientation of a political, sociological, or legal analyst, it would doubtless differ in its emphasis, for example, on efficiency relative to equity and other social goals, and on outcomes compared with procedures.

In the remainder of Part One we will set the foundation and analytic perspective. Chapter Two develops our approach at the theoretic level and defines terms. The analytic structure it sets forth is the foundation for the balance of the book. It discusses such matters as how we define the public interest, how the term public interest law relates to legal aid and pro bono activities, how the potential role of not-for-profit organizations relates to the success of governmental efforts to correct failures of the private, for-profit sector of the economy, how the role of the law, particularly litigation, relates to alternative instruments for achieving public interest goals, and how public interest activities are likely to affect the relative well-being of various subgroups of the population.

Chapter Three expands on the sources of governmental failures, thereby highlighting the reasons for believing that some new mechanism — an extra-governmental and extra-private market mechanism — has at least a potentially useful role to perform in helping us to reach our public interest goals. In Chapter Four we move out of the abstract, conceptual level in order to describe the public interest law industry as it currently exists; we portray its size, composition, and activities. Chapter Five combines theory and empirical information in an analysis of the kind of behavior that can be expected from a public interest law firm, given the types of people who make its decisions, the nature of its financing, and, in general, the kinds of incentives that confront it; particular attention is directed at the factors affecting the firms’ choice of cases to handle and the methods used in pursuing the cases. The final chapter of Part One, Chapter Six, develops the point that both in theory and in fact, public interest law activities do not benefit simply some abstract public interest, but benefit particular population sub-groups. This chapter uses opinion polls and other information in order to portray the likely distribution of benefits from public interest law activities among people with various demographic characteristics.

Part Two contains studies of actual public interest law activities in each of eight problem areas. In each of these area-study chapters, the author does three things: (1) describes the types of problems dealt with; (2) analyzes whether the objective, if attained, would contribute to efficiency in resource use, or to distributional equity, or both; and (3) assesses the success of the public interest law intervention. Special note is taken of the distinction between success at the judicial level and success at the real, behavioral level.

While the area-study chapters have much in common — all are guided by the conceptual framework of Chapter Two — each makes a unique contribution which complements the others. Chapters Seven and Eight, on environmental advocacy, focus on the difficulty public interest law faces in dealing with disputes that are complicated by any of a variety of factors, such as the technical difficulty of the subject matter or the multiple loci of decision-making. Chapter Nine, on land use and housing issues, illustrates the potential conflicts among public interest law advocates, showing that both sides of a dispute may be represented by public interest law firms; thus, there are no clear criteria for choosing clients. Chapter Ten describes public interest law advocacy in the employment dis crimination area, which is one of the few areas where public interest law firms are primarily seeking equity objectives. Chapter Eleven focuses on occupational safety and health, and suggests that public interest law activity may not be justified in areas where there is substantial private- for-profit or governmental activity. In Chapter Twelve, public interest law activity is portrayed as part of a broad social movement — involving a wide array of private, governmental, and not-for profit organizations — seeking a single objective, in this case education finance reform. Chapter Thirteen focuses on the health care delivery system in order to contrast the ability of public interest law to resolve fundamental problems, such as the inequitable distribution of physician services, with its ability to resolve more narrow problems, such as the failure of mental health care systems to provide adequate treatment for involuntarily confined mental patients. Chapter Fourteen discusses public interest law advocacy in the consumer area, which was one of the first areas that public interest law became involved in, and is still one of the most important in terms of volume. The final chapter in Part Two, Chapter Fifteen, looks at public interest law efforts to improve the efficiency and equity of taxation, an area where certain minority interests seem to have a stronger voice than majority interests. Throughout Part Two the analyses focus less on the specific public interest law activities than on the generalized ability of public interest law groups to deal effectively with the problems in each area.

If public interest law efforts may be thought of as the outputs of the public interest law industry, the chapters in Part Two also show the enormous variety of products being produced by this industry, and suggest how complex is the task of determining the consequences of the industry’s existence.

Part Three includes, in addition to a summing- up chapter, three extensions of our main objective, which is to identify and assess the economic and social consequences of public interest law activities. In one extension, we look at public interest advocacy by non-law groups, and discuss the circumstances under which non-law advocacy may be more useful than law advocacy. In another, we broaden our geographical focus from the United States to the rest of the world, examining some of the variety of institutional mechanisms — private for-profit, governmental, private not-for-profit, and combinations of these — that are used in other countries. The third chapter of Part Three discusses the problem of financing public interest law, the sources of actual and potential support, and the efficiency and equity of each.

This volume represents an effort by a multidisciplinary team to assess the economic and social consequences of a recent institutional innovation, the public interest law organization. In order to perform the assessment we have found it necessary to develop a conceptual structure, a perspective, and to use a set of analytic tools, primarily from economics but also from the law and from sociology. We hope that we have contributed to an understanding of what this new institution is likely to be able to achieve, and why it can be expected to behave in particular ways. We also hope that in the process of studying one institutional form we have contributed somewhat to a methodology for examining the consequences of other institutional forms that have been or may be developed for pursuing the public interest. Because our focus is on the role of institutions as components of an interdependent economic-political-social system, our analytic structure and evaluation approach can be of interest, we believe, to political scientists, sociologists, and social historians as well as to lawyers, economists, and others who are concerned with the continuing pursuit of a more efficient and just system.

Chapter Two

Conceptual Perspective

on the Public Interest: An Economic Analysis

Burton A. Weisbrod

The objective of this chapter is to introduce the theoretical perspective from which our study of the economic and social consequences of public interest law activities proceeds. The emphasis here is on concepts — on ways of looking at issues; in later chapters we will attempt to make the concepts operational.

Our broad interest throughout the book is in evaluation — evaluation of a recent institutional innovation that has come to be termed public interest law (PIL). To perform the evaluation, to assess the usefulness of this new institution, we must define our terms and make explicit our evaluative criteria. We must, in short, not only decide what would constitute success for PIL activities, but we must also define a PIL activity — that is, we must define the essential characteristics of the institution whose consequences we are examining and evaluating. By essential characteristics we mean the characteristics that distinguish a PIL from a non-PIL activity or organization. An explicit definition is necessary because, as we shall see, there are other activities and institutions with similar goals, and to assess the consequences of PIL activities requires that they be demarcated from the others.

The Public Interest:

Equity and Efficiency

The concept of the public interest is complex and not susceptible of any simple definition.

The author thanks Robert Haveman, Mitchell Polinsky and participants in the Public Interest Law Project for their comments and suggestions.

While the term public interest has been used in many contexts through the ages, there has developed no consensus as to what it means, even in an approximate sense (see the chapter Appendix). It is not our hope — at least, not realistically — that we can succeed here in defining the public interest in a manner that will resolve the matter and end debate. Nonetheless, since we have set out to identify the nature and consequences of public interest law activities, and also have set out to make some assessment of the effectiveness of such activities in actually contributing to the public interest, we will attempt to come to grips with the problem of defining the public interest.

There are many facets to the public interest, which is why it has been so difficult to arrive at a consensus definition. It seems, however, that many of these facets can be grouped under two principal headings: efficiency and equity. Efficiency, in this context, concerns the size of society’s output pie, while equity involves judgments about the relative amounts of the pie that go to various people, and the process by which (or the procedural justice with which) the amounts are decided.

Some elaboration of what we mean by economic efficiency and equity can be helpful at this point. First, efficiency. We want to focus attention on one of the two key economic concepts of efficiency, allocative efficiency, as distinguished from technical efficiency. The latter may be thought of as involving the provision at the lowest cost possible of whatever particular set of commodities and their quantities are being produced. Such cost minimization or technical efficiency requires every producer to consider the alternatives available for producing a given commodity, and the costs of the labor, machinery, and other resources required by each technique, in order to discover the least costly process. Insofar as producers act as profit maximizers, they would be led to minimize the total cost of producing whatever they produced. In so doing, they would be acting in a technically efficient way. The opportunities for a producer to make technically efficient choices may be constrained, however, by legal restrictions such as those on employment discrimination and on unsafe or unhealthful production processes.

The allocative efficiency concept, however, is of greater concern here. It has to do with the degree to which productive resources of all kinds are put to their most valuable uses. If, for example, a worker were to value an additional hour of leisure time at, say, $4 (that is, he would prefer not to work the extra hour unless he could be paid at least $4), while at the same time a prospective employer valued an additional hour of the labor of a person with the skills of that worker at $5, then it would be allocatively efficient for the worker to work the extra hour rather than to take the leisure; both the worker and the employer would be made better off if they negotiated an agreement at some wage between $4 and $5 rather than have the worker remain idle and the employer forego the output to which the worker would contribute. Similarly, if that worker were indifferent about a choice between working for employer A, who valued the worker’s labor input at $5 per hour, and employer B, who valued it at $6 per hour, then allocative efficiency requires that the worker work for employer B. The same concept of allocative efficiency applies to all resources; efficiency requires that they be put to their most valuable uses, but note that one possible use is to retain the resource in an unused (leisure) form, at least temporarily.

If markets are operating well — that is, if (1) resource owners, including workers and households, know what they can earn in various uses of their time, if (2) producers know the prices at which they can sell added output, and if (3) the prices that producers can get are close approximations of the prices that consumers are willing to pay — then competitive forces can be expected to bring about allocative efficiency. If, however — to anticipate the type of example to which we will frequently refer in Part Two of this book — condition (3) does not hold, so that producers are unable to capture consumers’ demands and then translate them into demand for productive resources, then too few resources will come to be devoted to production of the commodity involved. Resources would be misallocated; there would be an inefficiently low level of resources allocated to that commodity. This would occur if, for example, individual consumers did not transmit their true demands (that is, their willingness and ability-to-pay), perhaps because each consumer hoped to benefit (as a free-rider) from the expenditures of other consumers for collective-type goods such as roads, scenic areas and environmental preservation. But whatever the causes — and we will discuss them further, below — allocative inefficiency will result unless consumer economic demands are fully — but not more than fully — transmitted to producers. Allocative efficiency thus requires that conditions (1), (2), and (3) hold; consumers and producers must be well informed and consumers must be able to transmit their well-informed demands to producers capable of meeting them.

With regard to equity, there is a public interest in achieving an equitable division of the society’s income and other rewards, and of opportunity for individuals to improve their own positions, although, to be sure, the precise definitions of the terms equitable and opportunity are controversial.

Equity is itself a multi-dimensional social objective about which many volumes have been written.1 Sometimes the emphasis is on money income, sometimes on a broader class of society’s rewards, including not only goods and services but also social status, esteem, and justice. A distinction has been drawn between treating people equitably and treating them equally, the difference reflecting the judgment that since people differ in their capacities and needs, it is inequitable to treat people equally. Of particular note is the distinction between the equity of the process

by which social decisions are made and the equity of the outcome of that process. In deciding how equitable the economic system is, some people emphasize the process by which it determines how income (purchasing power) is divided; others concentrate on the results of the process — for example, the degree of inequality of money income. Others focus on the degree of inequality, not of total purchasing power, but of actual purchases of certain basic goods and services such as housing, food, medical care and, perhaps, legal representation.

We will not attempt here a complete survey of the variety of conceptions of equity; suffice it to say that they have in common a view that society is, and should be, concerned with how its largesse — in whatever form, tangible or intangible — comes to be divided among the population.

Efficiency and equity are not necessarily mutually exclusive social goals. The goal of allocative efficiency does not involve preoccupation with a narrow concept of cutting costs regardless of its effect on the quantity and quality of the resulting output. Neither does efficiency imply the converse of equity; that is, it is both efficient and, most people would agree, equitable, to organize the economic system so that (l) consumers are able to obtain the goods and services that they want, not the goods some planner or other authority has decided they should have; and that (2) at least to some extent, more of society’s limited goods and services should go to persons who have been more productive in contributing to the society’s output of those goods and services. An efficient allocation of resources would do both of these things. People differ, of course, in their views about the degree to which (other) consumers should have what they want, and they differ as to the degree to which output should be divided according to one’s contribution — that is, according to one’s earnings and purchasing power (which are similar though not identical terms).2 Nevertheless, insofar as there is some consensus that (1) and (2) above are desirable attributes of a socio-economic system, it

Introduction and Theoretic Analysis follows that the requirements of economic efficiency and distributional equity sometimes coincide or, at least, overlap.

In short, we suggest that there is a public interest in obtaining an efficient use of resources, and in dividing in an equitable way the fruits of the use of those resources. When, in our applied work below, we examine actual PIL activities, we will attempt to identify when the apparent objective and the consequences of those activities involve primarily equity issues — that is, issues regarding the distribution of goods, services, and other rewards among people (either the actual distribution or the procedural mechanism by which the distribution is determined) — and when the PIL activities are focused on efficiency considerations.3 To make this distinction is not to imply that one is more important than the other. Solutions, however, are likely to differ depending on what the source of the problem is. Moreover, we shall see later, when we examine the potential role for public interest law activities, that the distinction between efficiency and equity will help us to draw some useful distinctions among conventional pro bono legal work (work performed by private attorneys for no fee or for a reduced fee), legal aid for the poor, and public interest law, and will then help us to relate these activities to the larger economic system.

While the equity-efficiency distinction, and the trade-off it implies, is useful, it should be recognized as being essentially arbitrary (in the sense that efficiency and equity are interrelated, and therefore difficult to distinguish), notwithstanding its conventional use in economics. As with all classification systems, its usefulness is the key issue — not whether it is correct. In this study we find it useful to distinguish between those (PIL or other) activities that primarily involve benefiting one group at the expense of another — and that therefore must be evaluated in distributional-equity terms — and those activi-

3. On the conflict between equity and efficiency, see Arthur M. Okun, Equality and Efficiency: The Big Tradeoff (Washington, D.C.: The Brookings Institution, 1975), and Martin C. McGuire and Henry Aaron, Efficiency and Equity in the Optimal Supply of a Public Good, Review of Economics and Statistics, LI (February 1969), pp. 31-39. Also see I.M.D. Little, A Critique of Welfare Economics (Oxford: Clarendon Press, 1950), especially Chap. 6, and E. J. Mishan, A Survey of Welfare Economics, 1939-1959, Economic Journal LXX (June 1960), pp. 197-256.

ties for which the anticipated result is an enlargement of total benefits for everyone — efficiencybased activities. The logic of this distinction rests on the view that the latter class of activities may be less controversial as to its desirability and hence easier to evaluate, although we will see that this is by no means true in all cases.

The conceptual distinction between efficiency and equity is too neat, however. Even at the theoretic level it is clear that programs that may be potentially efficient, in the sense that they could conceivably make everyone better off, do not in fact benefit everyone. No matter how efficient a particular use of resources may be — that is, no matter how large the excess of the total value of the output over the total cost of the inputs — it is almost certain that some people will be hurt by the change in the allocation of resources. The output may be such that even though many people reap great benefit from it — for example, from decreased pollution of streams and waters — some will be adversely affected, such as the producers who must find alternative, higher-cost means for waste disposal, and the consumers who buy their products.

Even if no one is adversely affected by the output effects of a change in resource use, some people could be hurt by the input price effects. Any reallocation of resources — any shifting of resources from one use to another — will also shift patterns of demand for various types of labor, land, and capital equipment; some resource owners will find that the prices and wages they receive increase, while others find decreases. Moreover, whether a person is made better or worse off by changes in output and input markets, his economic well-being could be affected by the size of his gain or loss relative to those of other people — the envy effect — and by the size of his gain or loss relative to what he anticipated. In short, whether through changes in output prices, in input prices, or in other ways such as the dislike that some people may have for activities that many other people like a great deal,4 there is a strong presumption that even a highly efficient use of resources will bring redistributional equity effects, and these may or may not be judged to be desirable.

Just as efficient programs are almost certain

The preceding discussion has pointed out that whatever the intended result of any activity may be — to enhance either economic efficiency or distributional equity — the results will be change (favorable or unfavorable) in both efficiency and equity. Nonetheless, in any given instance the actual or the anticipated effect of a program will sometimes be preponderantly of a distributional sort, and in other situations, preponderantly of an efficiency sort, as we will see in the area-study chapters of Part Two. Thus we find it useful analytically and expositionally to draw the efficiency-equity distinction, recognizing nonetheless that in the real world we do not find such neat distinctions.

However instructive it may be to separate economic efficiency from distributional equity considerations, the fact is that both are types of criteria for judging how well an economic system is performing. Both involve normative judgments. Both are desirable in abstract terms, and controversial in operational terms, and, while we might be able to make the controversies clearer, we will for the most part be unable to resolve them. In our applied work below, we will point up distributional consequences of public interest law activities as well as of other private and governmental activities, but the reader will be left to judge whether the distributional consequences are equitable.

We will also point out how redistributional efforts can be expected to bring about efficiency effects on incentives to work and produce. It is one matter, however, to determine what those efficiency and equity effects are, another matter to reach an agreement as to whether they are desirable or not, and still a third to decide whether, if there are any undesirable effects, they are outweighed by the favorable effects.

When programs are efficient and their distributional effects are deemed equitable, they may be judged clearly desirable. In our examination of the consequences of economic behavior of the private, for-profit sector, the government sector, and the voluntary, non-profit sector and its public interest law component, we will attempt to make clear in what respect each sector can be expected to contribute to the public interest in efficiency and in equity. We will also point out when the contribution to one is consistent with a contribution to the other, and when there is conflict.5

While the concepts of equity and efficiency can be interpreted broadly enough to encompass

virtually any notion of the public interest that anyone has ever suggested, we do not intend to argue that efficiency in the allocation of resources and equity in the division of the society’s income, output, and opportunities necessarily constitute the only socially relevant dimensions of the public interest. We simply wish to suggest that equity and efficiency are indeed two important components of the public interest. Our objective here is to show, in a general way, how the public interest and a group of activities coming to be known as public interest law can be linked to each other and to other parts of the economic and social system.

The concept of the public interest may also be usefully related to welfare economists’ conception of a social welfare function. A social welfare function is a statement of how an index of welfare changes in response to changes in particular variables.6 In general, we may view a society’s economic welfare — a component of total welfare — as depending on the amounts of real goods and services that each individual has, and also on the degree of inequality in the distribution of those goods and services (that is, of income). In short, this is to say that economic welfare depends on (1) efficiency, which determines the total amount of goods and services produced in the economy, and on (2) equity, for which the degree of inequality in the distribution of society’s productive output is a proxy.7

The approach in the balance of the chapter is this: first, we examine briefly the circumstances under which the public interest in efficiency and equity is likely to be achieved by the freely functioning decentralized process of the private marketplace. Following this analysis in which we discuss the conditions under which the private, for-profit sector can be expected to fail to achieve efficiency and equity, we analyze the government sector’s ability to correct those effi-

6. On the social welfare function, see Abram Burk (Bergson), A Reformulation of Certain Aspects of Welfare Economics, Quarterly Journal of Economics LII (February 1938), pp. 310-334, and Jerome Rothenberg, The Measurement of Social Welfare (Englewood Cliffs: Prentice-Hall, 1961).

7. Richard Musgrave has equated the public interest with efficiency alone, not with equity. See his The Public Interest: Efficiency in the Creation and Maintenance of Material Welfare, in Carl J. Friedrich, ed., Nomos V: The Public Interest (N.Y.: Atherton Press, 1962), pp. 107-114, esp. page 110.

ciency and equity failures. Concluding that there are also reasons to expect governments to fail as correctives, we consider the potential ability of the voluntary sector — which includes nongovernmental, not-for-profit organizations and activities — to correct the failures. The roles of public interest law and of non-law activities within the voluntary sector will be sketched. There are, to be sure, also reasons for expecting failures of the voluntary sector, and specifically of its public interest law (PIL) sub-sector, and we will examine these as well.

The Private Sector

In this country, the bulk of economic activity traditionally has been, and is generally felt to properly be, in the private, for-profit (free enterprise) sector of the economy. There is widespread acceptance of the ethic that private individuals should be as free as possible to engage in the production, distribution, and purchase of goods and services. Adam Smith, writing two centuries ago, argued persuasively that private markets, when comprised of competitive profit- motivated firms and utility-motivated consumers, all acting in their own self-interest, will allocate the economy’s resources efficiently, under a wide variety of circumstances. This view of the general effectiveness of the private sector in achieving efficiency — one component of the public interest — is widely accepted by economists. At the same time, limitations on the private sector’s ability to maximize economic welfare have also come to be recognized. There are circumstances under which the private sector can be expected to be incapable of promoting maximum allocative efficiency. Moreover, limitations on that sector’s ability to promote equity in the distribution of income are acknowledged quite generally. The present discussion focuses on efficiency; equity issues are examined later in this section.

The concept of economic or allocative efficiency involves fundamentally a comparison of the values to consumers and to resource suppliers of alternative uses for the economy’s human and physical resources. Resources are allocated efficiently when every consumer gets the goods and services he wants, so long as he is willing and able to pay enough to compensate workers and other resource owners for their voluntary supply of the resources required in production of those goods and services.⁸

This concept of efficiency is derived from an individualistic ethic which holds that the social welfare is inseparable from the welfare of the individuals in the society. By such a conception it is definitionally true that an action cannot be in the public interest if it would make everyone worse off. More significantly, since in reality virtually any action would benefit someone, our concept of efficiency implies that it is not in the public interest — because it is not efficient — to devote resources to any specific use when the most that those persons who would benefit from it are willing and able to pay is less than what other persons are willing and able to pay for an alternative use of the resources. The efficiency concept is tied, thus, not only to a particular notion of what society is — it is not something apart from its members — but also to a weighting of individuals’ intensity of want by their willingness and ability to pay.

Clearly, other concepts of efficiency are possible. Among them is a perspective on society not as a group of people but as a functioning organism, a continuing institution transcending the individuals who comprise it at any point in time. An efficient use of resources might thus be conceived as one which maximizes the organism’s ability to survive through time, subject perhaps to certain constraints involving technological feasibility and guarantees of certain fundamental individual rights.

Another notion of efficiency would conceive of individuals as deciding not on the desirability of one allocation of resources versus another, but on a process for arriving at such decisions. Thus, a constitution can be viewed as an agreed-upon set of rules for determining and restricting what is efficient.⁹ The United States Constitution,

8. The concept of efficiency is more complex than can be captured in a brief discussion. For further discussion see an introductory textbook such as Economics, by Paul A. Samuelson (N.Y.: 9th edition, McGraw-Hill, 1973), especially Chapter 32; or, at a somewhat more advanced level, Peter Bohm, Social Efficiency, a Concise Introduction to Welfare Economics (N.Y.: John Wiley and Sons, 1973), Chapter 1.

9. For further discussion see James M. Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor, Michigan: University of Michigan Press, 1962), especially Chapter 6, A Generalized Economic Theory of Constitutions, pp. 63-84.

for example, provides for due process without explicit attention to its benefits and costs in each specific instance. Indeed, it can be argued that the cost of determining the costs and benefits of the due process guarantee in each instance is sufficiently great that it would be inefficient to make such a determination; the Constitutional guarantee can thus be thought of as the reflection of a judgment that, on average, through time, the resources required to carry out the requirements of the guarantee will bring benefits in excess of costs.

We shall not attempt here to solve such difficult and complex puzzles involving the interplay of social, political, economic, and legal institutions. We will be able, fortunately, to shed some light on the role of public interest law and other public interest activities without examining the full scope of the issues. We shall see, for example, that even from a somewhat narrow perspective we can sometimes perceive social problems which neither private, for-profit markets nor governments are likely to handle satisfactorily. Whether some other, public interest institutions can do better— that is, be more efficient or more equitable — will be examined. We will attempt not to end debate about how efficiency and equity should be defined, but to be clear as to how the analysis of the role and effectiveness of public interest law and similar institutions hinges on such definitions.

There are conditions under which the actions of private, profit-motivated firms are not expected to lead to efficient patterns of production and consumption. While these conditions can be stated in a variety of ways, one such classification would include the presence of (a) noncompetitive, monopolistic conditions among sellers or buyers; (b) external effects, which mean, for example, that one consumer’s purchase of a commodity would bestow either benefits or costs upon other consumers or upon other third parties; and (c) transactions and organizational problems, which are barriers to the flow of information between consumers and producers. Frequently, it is helpful to think of another barrier to efficiency: (d)collective goods — those such as national defense or public health sanitation measures from which many consumers benefit simultaneously. While the market efficiency problems posed by collective goods — which are essentially problems of determining both individuals’ and total effective demands for the goods — can be examined as issues involving conditions (b) and (c), it will be useful to focus attention, in our study of the role of public interest law, on the collective-good problem of free-rider behavior — the tendency of self-interested people to forego their own purchases of collective goods in the private market, in the hope that some other person will pay for the goods so that they can benefit without paying.

Private Market Efficiency Failures: Actual or Potential

Throughout our analysis it is important to bear in mind the distinction between a potential and an actual market failure. The transactions and organizational problems mentioned in the preceding paragraph illustrate the point. When external benefits are large and dispersed among many people, transactions costs associated with the transmission of economic demands from consumers to producers tend to be large. As a result, the private sector can be expected to confront the free-rider and accompanying underprovision problems we have sketched above.¹⁰ While we have termed the result a private market efficiency failure, that characterization is too simple. The fact that such costs exist implies only that there is a potential market efficiency failure, or that a problem exists: there is a deviation from the ideal of full transmission of information about consumer wants to prospective satisfiers of those wants. Yet in reality such an ideal cannot be attained (and would be inefficient to attain even if it were feasible) because of the real, resource-using costs of obtaining and transmitting information.¹¹

To see this more clearly, assume that it were the case — if only the truth were known — that many people would benefit, and in the aggregate, substantially, from increased production of some good or service. Yet if it were truly expensive to find out what the facts are about the magnitude of such benefits relative to the cost of expanding

10. For further discussion, see Mancur Olson, Jr., The Logic of Collective Action (Cambridge: Harvard University Press, 1965).

11. See Ronald Coase, The Problem of Social Cost, Journal of Law and Economics, III (October 1960), pp. 1-44; and Roland N. McKean and Jora R. Minasian, On Achieving Pareto Optimality — Regardless of Cost, Western Economic Journal, V (December 1966), pp. 14-23.

production, then the potential market failure may not be an actual failure at all. An actual market failure may be said to occur if, and only if, the real cost of eliminating or reducing the extent of the failure is less than the resulting benefits. There are many circumstances under which people would like to have more information, or would like to be able to organize with other like-minded people in order to make their demands known. Only if there exists a way to diminish transactions and organizational cost barriers to the flow of information, and if the cost of doing so is less than the welfare losses now being sustained — only then would we say that there is an actual market failure. The same is true regarding the external effects of any other cause of market failure; only if the cost of dealing with the problem is exceeded by the benefits would it be useful to regard the private market as having failed — where cost means the value of other desired production that must be foregone. What is at issue, thus, is whether potential failures of private markets that do occur can be corrected through the efforts of governments, voluntary, non-profit organizations, or, more specifically, PIL groups, and at a cost that is less than the expected benefits. Even at the theoretic level of this discussion — where we do not examine any data — it is clear and important that the identification of a potential private market failure does not logically imply that either government, PIL or other extra-market institutions can correct the private market shortcomings at sufficiently lower cost; it remains for analysis to determine, therefore, whether all, some, or any of the potential private market failures are actual failures. In Chapter Three we consider, still at a quite abstract level, the ability of governments to correct the efficiency and equity shortcomings of private markets, and the bulk of the remainder of this book examines the ability of PIL to do so.

From this point onward we use the term private market failure to mean a potential failure; the context of the analysis is precisely the question whether extra-market institutions, governmental or voluntary PIL or other, are likely to be able to succeed in correcting the failures of private for-profit markets.

Problems of Achieving Efficiency and Equity

The term private market failure refers traditionally to the circumstances under which decentralized private organizations, seeking to maximize their own profits, can be expected to make decisions that result in inefficient resource allocations. The economists’ conventional market failure terminology thus applies only to the allocative efficiency aspect of the public interest, as we have defined it above; it does not refer at all to the distributional equity aspects of the public interest concept. With respect to the inefficiency problems confronting private markets, there is a considerable literature in economics and we shall not attempt to survey it here.¹²

The market failure concept generally has not been applied to the distributional effects of private sector activities because that sector has been seen as a mechanism for achieving efficiency, and, hence, as judgable only in efficiency terms. While some economists have also argued the inherent fairness of a private market system that rewards people according to their contribution to output, most economists have acknowledged that, even at a theoretic level, the income distribution generated by a private market would not necessarily, or even probably, be ethically desirable, even if all people began life with equal endowments of human and material capital, but especially if they did not.¹³ Thus, the prevailing view is that it is a proper role of government to bring about an equitable income distribution. As one writer put it, there are very few countries where the citizens accept the income distribution that comes into existence of itself in the markets.¹⁴ This does not necessarily imply a denunciation of the system of private-market rewards and behavior, but is simply an observation that private markets will not generally overcome the effects of unequal intergenerational wealth transfers or of gross inequalities in ability and family background.

Efficiency Failures. Unregulated private markets can be expected to fail to meet consumer

12. See, for example, Francis Bator, The Anatomy of Market Failure, Quarterly Journal of Economics, LXXII (August 1958), esp. pp. 363-365 and 369-371; Jesse Burkhead and Jerry Miner, Public Expenditure (Chicago: Aldine, Atherton, 1971), pp. 99-141, and the bibliography, pp. 141-144.

13. Arthur M. Okun, Equality and Efficiency (note 3 above), concludes his chapter on The Case for the Market: Although the ethical [income distributional] case for capitalism [that is, for the private market] is totally unpersuasive, the efficiency case is thoroughly compelling to me (p. 64).

14. Leif Johansen, Public Economics (Chicago: Rand McNally and Co., 1965), p. 19.

demands whenever there are significant problems (costs) that have the effect of keeping prospective buyers and sellers apart. We have termed these transactions costs, understanding that they include a variety of obstacles to the transmission of effective demands (willingness and ability to pay) from consumers to providers. Included are the costs to each individual of learning which characteristics of goods, services, and jobs are relevant to that person’s decisions (information costs); the costs to individuals of understanding and utilizing the information (processing costs); the costs to firms of finding out who is willing to pay what amount of money for some commodity (communication or revelation-of- demand costs); and the cost of collecting the money from what may be a large and dispersed group of people each of whom is willing to pay only a small amount (collection costs). All of these act as barriers to ideal, smoothly functioning private markets. The more costly it is for consumers to obtain information about product quality in understandable terms, for producers to obtain information about the extent of consumers’ demands, and for firms to obtain payment from consumers for the goods produced, the greater the probable divergence between patterns of private-market production and patterns of consumer demands and, hence, the greater the failure of the private sector to use resources efficiently.

Such transactions costs and, hence, the problems facing private producers, are most likely to be large when the goods or services demanded have significant external or third-party effects (the buyer and the seller are the first two parties). In the case of such collective-type goods, the value of the commodity to any one person might be small compared to the cost of the commodity, and yet the value to consumers as a whole — including the third-party beneficiaries — might be far in excess of the cost. Unless some mechanism is developed whereby the aggregate net value of the commodity is (a) determined and (b) transmitted to a producer who (c) can actually collect enough from the beneficiary group to cover his (incremental) production costs, the production will not take place. If, to take one extreme case, there were only one such external beneficiary (or loser), and if that person were physically close to, and knew, the prospective purchaser, then these transactions cost problems would be of little consequence, and no quantitatively important deviation from efficient resource use would be likely to result in the private market. At the other extreme, however, if there were a large number of external beneficiaries, and if they were geographically dispersed and were unaware of each others’ identity, then the private market might fail completely; none of the commodity might be produced, or, more generally, the actual level of production might be tiny compared to the efficient level — the higher level at which the aggregate willingness of all consumers to pay for an incremental unit of output no longer exceeded the incremental production cost.

Some illustrations would be useful in order to clarify the sense in which these transactions costs are at the root of efficiency problems (market failures) in the private sector. If person or firm A’s immediate neighbor would derive large benefits (or incur large losses) as a result of some action by A, then the