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Module 4
Lecture 18
Topics
4.20 Private Sector Under Provision Revisited
4.21 Provision of Public Good: Revisited
4.22 Lindahl Equilibria: Properties
4.22.1 Lindahl Conditions
4.22.2 Lindahl Pricing: Intuition
4.22.3 Lindahl Equilibrium
NPTEL-Economics-Public Economics
Individual h solves
Subject to
Nash equilibrium outcome is given by
i.e.
Rule for optimal public good provision, Samuelson rule, is not satisfied.
Pareto improvement possible if each person invested
public good.
Each person contributing
total contribution
Assuming an additive utility function, with 1 more unit of G, net welfare change
for h is:
= (gain in utility from 1 extra unit of public
good) + (1/H) (Fall in utility from giving up 1/H amount of private good)
Pareto Improvement
NPTEL-Economics-Public Economics
NPTEL-Economics-Public Economics
Demand for:
& H unknowns
Samuelson rule applies and outcome is pareto efficient
4
Indian Institute Of Technology, Kanpur
NPTEL-Economics-Public Economics
Figure 18.1
Suppose As demand curve for public good is steep and Bs demand curve for public
good is flat.
Aggregate demand:
Vertical sum
With SMC =1 (remember price of G=1). It is beneficial to produce the good.
Suppose the socially efficient level of G is 75
This generates a tax price of
for A
for B
As Surplus =E F G
Bs Surplus = H I J
The production at 75 is equilibrium for 2 reasons:
(1) Both A & B are happy to pay those tax prices to get that quantity.
(2) Government has covered the marginal cost of production by charging each
person their marginal willingness to pay.
5
Indian Institute Of Technology, Kanpur
NPTEL-Economics-Public Economics
Each person announces how much of the public good he or she wants at those tax
prices.
If everyone demands the same level of public good, then provide that level & split
the cost according to tax share.
If the individual announcements differ, the government raises the tax price for the
person who wants more of the good, and lowers it for the person who wants less.
Provision decision effectively secured through unanimity.
6
Indian Institute Of Technology, Kanpur