Optimal provision of public intermediate goods with imperfect competition: A note

Abstract

In a model where a public intermediate good and differentiated private intermediate goods produce a final good, this paper explores multiplier effects on aggregate output of the private goods of the public good, and the optimal level of government spending on it. When it provides a Hicks‐neutral enhancement of productivities of private inputs, its second‐best level is identical to its first‐best level because the multiplier effect is independent of its level. However, when the public good is non‐neutral, the second‐best supply level is lower (higher) than the first‐best when it is purely goods‐saving (labor‐saving).