Government Subsidies to Private Spending on Public Goods
This paper examines how the size of an efficient subsidy varies with the amount of freeriding and the presence of distorting taxation. Ironically, the existence of free-riding, where some individuals make no voluntary contribution at all, reduces the size of an efficient subsidy and makes a subsidy more attractive compared to direct taxation. For the gain to be significant, the number of donors must be extremely few in number. Even when the gains from a subsidy relative to direct taxation are small, a subsidy may dominate direct taxation because it can reveal an efficient level of the public good. The analysis distinguishes between traditional public goods such as national defense, and what the author calls transfer public goods, where members of society care about the consumption of a particular group in society such as the poor. He generalizes the Samuelson (1954) results to derive conditions for efficiency in providing transfer public goods. Copyright 1992 by Kluwer Academic Publishers
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