Public versus Private Provision of Public Goods
AbstractIt is well known that pure public goods are underprovided in static games with private, voluntary contributions. Public provision is usually modeled using a median voter framework, in which the public good is funded by a proportional income tax. This paper compares the private and public provision of public goods in dynamic settings. With private provision, it is possible to sustain cooperation and provide the public good efficiently. With public provision, dynamic majority-rule solutions exist even when taxes are not restricted to be proportional to income; thus, income redistribution can be chosen jointly with the level of the public good. At low discount factors, private provision tends to result in lower levels of the public good relative to public provision. As patience increases, however, public provision results in lower levels of the public good than private provision. This occurs because higher levels of income redistribution are sustainable under public provision. Such redistribution becomes increasingly feasible at higher discount factors, resulting in income subsidies for particular groups instead of higher levels of the public good. In contrast, under private provision, all groups are forced to settle for increases in the level of the public good. In terms of financing the public good, private provision tends to result in benefit taxation, with little variation in individual contribution rates. Public provision allows a wider range of tax rates, although there is a tendency towards benefit taxation when preferences vary and progressive taxation when incomes vary.
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Bibliographic InfoPaper provided by Occidental College, Department of Economics in its series Occidental Economics Working Papers with number 2.
Length: 24 pages
Date of creation: Mar 2006
Date of revision: Mar 2006
majority rule; Condorcet winner; public goods; voluntary donations; dynamic games;
Find related papers by JEL classification:
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-04-29 (All new papers)
- NEP-MIC-2006-04-29 (Microeconomics)
- NEP-PBE-2006-04-29 (Public Economics)
- NEP-PUB-2006-04-29 (Public Finance)
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