Voluntariness and efficiency in the provision of public goods

International Tax and Public Finance, 2008

Applying a willingness-to-pay approach known from contingent valuation in environmental economics we first develop an ordinally based specific measure for the size of individual sacrifice that is connected with an agent's contribution to a public good. We then construct a selection mechanism that picks the unique efficient solution among all allocations that have an equal sacrifice as defined in this way. We show that the solution thus obtained not only corresponds to the egalitarian equivalent public good allocation devised by Moulin but also that it has much in common with the much older Lindahl equilibrium. Moreover, the equal sacrifice solutions as characterized in this paper fulfil the ability-to-pay as well as the benefit principle.

Lindahl equilibrium is an application of price-taking behavior to achieve efficiency in the allocation of public goods. Such an equilibrium requires individuals to be strategically naive, i.e., Lindahl equilibrium is not incentive compatible. Correlated equilibrium is defined precisely to take account of strategic behavior and incentive compatibility. Using the duality theory of linear programming, we show that these two seemingly disparate notions can be combined to give a public goods, Lindahl pricing characterization of efficient correlated equilibria. We also show that monopoly theory can be used to characterize inefficient correlated equilibria.

Research Papers in Economics, 2004

This paper seeks to reopen a discussion that the profession has considered settled and closed, namely, the issue of the optimal quantity of a public good to supply. Its focus is on the determination of the optimal quantity to supply of a public good in the Pigovian model as popularized by Musgrave. It argues that the vertical summation of the individual demand curves in the Pigovian model is as inappropriate as the rejected horizontal summation of individuals' consumption of public goods. The horizontal summation is inconsistent with the physical realities of public good supply suggesting an mmultiple of the quantity that is actually available, which is an illusion. The vertical summation while having the advantage of informing on efficiency taxes and equitable cost sharing formula suffers from the fallacy of aggregation and exaggerates the aggregate demand for public goods, thus misleading supply decisions. This realization comes from reckoning with the basic properties of pure public goods in particular nonrivalry-the joint supply property. Given this property, the paper submits that the optimal quantity of a public good is the largest quantity demanded by any single consumer (individually or as a collective). A corollary of this is that public goods consumption is not validly subject to aggregation by any means. Aggregation is irrelevant and that individual demand curves or schedules are required only for the determination of optimal benefit taxes and equitable cost sharing formula. That is, the individual demand curves for a public good or service should be considered only for the purpose of determining each person's fair and equitable share of the cost of supply (i.e. based on the individuals' marginal valuations) as shown in Figure 4. In other words, the so-called (collective) willingness to pay curve is only confusing issues and hence not required. This in no way implies the consumption of separate quantities to be added up. Rather, it stages the consumption of the same quantity by all with different payments that are added up to finance the supply, which conforms to the Pigovian solution and indeed all the solutions that have been advanced. Yet, it is unique from the earlier solutions. An equitable cost sharing formula that guarantees an efficient financing scheme is also proposed. It is a benefit share weighted cost sharing formula, which obviates the potential threat of fiscal drag. It is found that barring information failure, the public budget should ordinarily be enjoying surplus under optimal benefit taxes. That is with optimal benefit taxes, balanced budget is within easy reach with relief for taxpayers in relation to service benefits enjoyed and therefore, less resentment to taxation could be anticipated. These observations and findings need to be given serious thoughts. Though, the rationale for government intervention in an otherwise market economy is primarily seen in market failure, the ultimate justification is the gain in welfare from the achievement of Pareto improvements in resource allocation. It follows that the possibility of further Pareto improvements in welfare must be a welcome development. JEL: H41

Documentos De Trabajo De La Facultad De Ciencias Economicas Y Empresariales, 1988

We show that if there are Constant Returns to Scale in the production of the public good a) Any Lindahl equilibrium (L.E) is a Nash equilib::,ium (N.E.) in a price-setting game, b) not all N.E. are L.E., but just those fo::, which the production of the public good is positive and c) the set of L.E. and Strong Equilibria coincide. However if the supply function is continuously differenti_ able,L.E. is never a N.E. We end the paper with sorne general comments about the nature of the incentive problem.

Journal of Economic Theory, 1989

We offer a new formalization of Lindahl's equilibrium notion for public goods which yields an endogenous theory of profit distribution in line with the benefit approach to taxation. Increasing returns in the production of public goods are not a priori excluded. Our equilibrium notion coincides with Kaneko's "Ratio Equilibrium" for economies with only one public good. By reinterpreting the commodity space, the equilibrium concept can be applied to economies with purely private goods or with externalities, In the pure private good case, our concept singles out allocations that are efficient and where individual net payments agree with average cost.

Topics in Theoretical Economics, 2000

Journal of Public Economics, 2005

This paper argues that, in models with heterogeneous agents, the concept of the marginal cost of public funds (MCPF) will only be useful if it is compared with an analogous concept for the benefit side. The MCPF does not assume a unique value and is not particularly illuminating in and out of itself. Also gone is the benchmark status of MCPF = 1. Turning to the provision of public goods, using a mechanism design approach, the paper constructs a two-stage proof for Kaplow's [Kaplow, L., 1996. The optimal supply of public goods and the distortionary cost of taxation. National Tax Journal 49, 513-533.] proposition concerning the birrelevanceQ of labor supply and distributional concerns in public good provision. This highlights the two fundamental ingredients for his result. First, the provision of public goods per se, when it satisfies the Samuelson's rule, is only potentially Pareto-improving. Second, the actual Pareto improvement will materialize when, or if, one reforms the income tax structure. If the reform is not forthcoming, the decision on public goods provision must rely on redistributional concerns. Finally, the paper generalizes Broadway and Keen's [Boadway, R., Keen, M., 1993. Public goods, self-selection and optimal income taxation. International Economic Review 34, 463-478.] result to a model with many types of agents, many private goods and without making any assumptions regarding which self-selection constraints are or are not binding.

We show that if there are Constant Returns to Scale in the production of the public good a) Any Lindahl equilibrium (L.E) is a Hash equilib:-iurn (N.E.) in a price-setting game, b) not all N.E. ~-e L.E., but just those fo:-which the production of the public good is positive and c) the set of L.E. and Strong Equilibria coincide. However if the supply function is continuously differentiable,L.E. is never a N.E. We end the paper with sorne general comments about the nature of the incentive problem. (*) An earlier version of this paper benefited from cornments of A. Mas-Colell and R. Repullo .

We show that if there are Constant Returns to Scale in the production of the public good a) Any Lindahl equilibrium (L.E) is a Hash equilib:-iurn (N.E.) in a price-setting game, b) not all N.E. ~-e L.E., but just those fo:-which the production of the public good is positive and c) the set of L.E. and Strong Equilibria coincide. However if the supply function is continuously differentiable,L.E. is never a N.E. We end the paper with sorne general comments about the nature of the incentive problem. (*) An earlier version of this paper benefited from cornments of A. Mas-Colell and R. Repullo .

Metroeconomica, 2002