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Is there a Case for Public Provision of Private Goods if Preferences are Heterogeneous? An Example with Day Care

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  • Sören Blomquist
  • Vidar Christiansen

Abstract

A strong case for public provision of certain private goods has been established for an economy in which individuals have homogeneous preferences but differ in skill levels. There has been a critique of this model/mechanism arguing that heterogeneous preferences at a given skill level would invalidate the mechanism, implying that public provision of private goods is merely of theoretical, not of practical interest. The argument is that if the public provision level is set so as to fit the low skill person with a high preference for the publicly provided good, the low skill person with a low preference for the good comes out worse than in a system without public provision. In this paper we take this critique seriously and investigate if a public provision scheme can be constructed so that we obtain a strict Pareto improvement when going from a pure tax/transfer system to the public provision scheme even if preferences are heterogeneous. We find that heterogeneous preferences do not invalidate the benefits of publicly provided private goods. We also characterise the optimum tax and public provision policy.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 938.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_938

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Keywords: public provision; private goods; in-kind transfer; heterogeneous preferences; day care;

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References

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  1. Nichols, Albert L & Zeckhauser, Richard J, 1982. "Targeting Transfers through Restrictions on Recipients," American Economic Review, American Economic Association, vol. 72(2), pages 372-77, May.
  2. Epple, Dennis & Romano, Richard E, 1996. "Public Provision of Private Goods," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(1), pages 57-84, February.
  3. Blomquist, Sören & Christiansen, Vidar, 1998. "The Political Economy of Publicly Provided Private Goods," Working Paper Series, Uppsala University, Department of Economics 1998:14, Uppsala University, Department of Economics.
  4. Miguel Gouveia, 1997. "Majority rule and the public provision of a private good," Public Choice, Springer, vol. 93(3), pages 221-244, December.
  5. Cremer, Helmuth & Gahvari, Firouz, 1997. "In-kind transfers, self-selection and optimal tax policy," European Economic Review, Elsevier, vol. 41(1), pages 97-114, January.
  6. Blomquist, S. & Christiansen, V., 1995. "Topping Up of Opting Out? The Optimal Design of Public Provision Schemes," Papers, Uppsala - Working Paper Series 1995-13, Uppsala - Working Paper Series.
  7. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
  8. Allingham, M. G., 1975. "Towards an ability tax," Journal of Public Economics, Elsevier, vol. 4(4), pages 361-376, November.
  9. Katherine Cuff, 2000. "Optimality of workfare with heterogeneous preferences," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 149-174, February.
  10. Boadway, R. & Marchand, M., 1990. "The use of public expenditures for distributive purposes," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1990066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Robin Boadway & Maurice Marchand & Pierre Pestieau & María del Mar Racionero, 2002. "Optimal Redistribution with Heterogeneous Preferences for Leisure," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 475-498, October.
  12. Blackorby, Charles & Donaldson, David, 1988. "Cash versus Kind, Self-selection, and Efficient Transfers," American Economic Review, American Economic Association, vol. 78(4), pages 691-700, September.
  13. Bossert, W., 1993. "Redistribution Mechanisms Based on Individual Characteristics," Working Papers 9307, University of Waterloo, Department of Economics.
  14. Blomquist, Sören & Christiansen, Vidar, 1997. "Price Subsidies versus Public Provision," Working Paper Series, Uppsala University, Department of Economics 1997:12, Uppsala University, Department of Economics.
  15. Boadway, Robin & Marchand, Maurice & Sato, Motohiro, 1998. " Subsidies versus Public Provision of Private Goods as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 545-64, September.
  16. Besley, T. & Coate, S., 1989. "Public Provision Of Private Goods And The Redistribution Of Income," Papers, Princeton, Woodrow Wilson School - Discussion Paper 36, Princeton, Woodrow Wilson School - Discussion Paper.
  17. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  18. Boadway, Robin & Keen, Michael, 2000. "Redistribution," Handbook of Income Distribution, Elsevier, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 12, pages 677-789 Elsevier.
  19. Blomquist, Suren & Christiansen, Vidar, 1995. " Public Provision of Private Goods as a Redistributive Device in an Optimum Income Tax Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 547-67, December.
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Cited by:
  1. Jukka Pirttilä & Sanna Tenhunen, 2008. "Pawns and queens revisited: public provision of private goods when individuals make mistakes," International Tax and Public Finance, Springer, vol. 15(5), pages 599-619, October.
  2. Blomquist, Sören & Micheletto, Luca, 2004. "Redistribution, In-Kind Transfers and Matching Grants when the Federal Government Lacks Information on Local Costs," Working Paper Series, Uppsala University, Department of Economics 2004:15, Uppsala University, Department of Economics.
  3. Avner Ben-Ner, . "For-Profit, State, and Nonprofit: How to Cut the Pie Among the Three Sectors," Working Papers, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus) 0304, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).

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