On the Neutrality of Redistribution in a General Equilibrium Model with Public Goods

Abstract

We analyze a general equilibrium model of a completely decentralized pure public good economy. Competitive firms using private goods as inputs produce the public good, which is privately provided by households. Previous studies on private provision of public goods typically use one private good, one public good models in which the public good is produced through a constant returns to scale technology. Two distinguishing features of our model are the presence of several private goods and non-linear, in fact strictly concave, production technology for the public good. In this more general framework we revisit the question of neutrality of government interventions on private provision equilibrium outcomes. We show that relative price effects, which are absent with a single private good and under constant returns to scale technology for public good production, come to play an important role in our more general framework. Relative price effects provide a powerful channel through which government interventions can bring about redistributive wealth effects, which, in turn, will change equilibrium outcomes. While we confirm that the neutrality result holds for small taxes that involve only the contributing households, we show that contrary to what was shown in the one private good, linear production technology framework, a redistribution in favor of contributors is neither a necessary nor a sufficient condition to increase the level of privately provided public good. In particular, redistributions involving non-contributors only (i.e., without either subsidizing or taxing any contributor) can increase, or decrease, or leave unchanged the public good level. Even taxing a contributor and subsidizing non-contributors can move the public good level in any direction.