Voluntary Provision of Public Goods for Bads: A Theory of Environmental Offsets

Abstract

This article examines voluntary provision of a public good that is motivated, in part, to compensate for activities that diminish the public good. Markets for environmental offsets, such as those that promote carbon neutrality, provide an increasingly salient example. An important result is that mean donations do not converge to zero as the economy grows large. The equilibrium is solved to show how direct donations and net contributions depend on wealth and heterogeneous preferences. Comparative static analysis demonstrates how public good provision and social welfare depend on the technology, individual wealth and an initial level of the public good. Why do individuals voluntarily provide public goods? The question has received much attention in the economics literature, and two general answers have emerged. The first is based on a standard model of private provision of a pure public good. Agents are assumed to benefit from the aggregate level of a public good and thus have some incentive for private provision. While the additional incentive to free ride ensures that the equilibrium level of the public good will fall short of the Pareto-efficient level, the theory nevertheless predicts some degree of voluntary provision. 1 The second explanation has grown out of the need to reconcile why observed levels of private provision regularly exceed those that the standard theory predicts. Research in this area can be characterised broadly as refinements or extensions on the impure public good model. The general approach is to assume that agents obtain a private benefit from some aspect of their own provision and this encourages provision beyond that which would occur if benefits came from only the public good itself. Different interpretations of the private benefit range from a feeling of warm-glow satisfaction, social approval, prestige and signalling about income. 2 The present article pursues a further explanation for voluntary provision of a public good. The idea is that provision may occur, in part, to offset other activities that have an adverse effect on a public good. Consider an activity that produces a negative externality through diminishing the level of a public good. Assuming the individual cares enough about the public good, she may seek to minimise her adverse effect on it. One possibility is for the individual to restrain her behaviour voluntarily. 3 Another possibility, which need not be mutually exclusive, is for the individual to offset some (or all) of her detrimental effect through direct provision of the public good.