Weakly democratic regular tax equilibria in a local public goods economy with perfect consumer mobility

Abstract

In this paper we study the existence of equilibria in a local public goods economy which has the following structure. There are a finite number of geographical regions. Each region has a government which provides public goods locally by buying private goods inputs on competitive markets and transforming these inputs into outputs of public goods by using a convex technology. The local public goods are pure in the sense that all the local residents consume the total produced, with no spillovers to other regions. Each regional government raises revenue from the residents of its region to cover the costs of the public goods it provides. The local governments are assumed to be weakly democratic in the sense that no public sector proposal (that is, a vector of public good provisions and a tax scheme to pay for it) will be enacted for which there exists an alternative proposal which is unanimously preferred by the local residents. (Note that it is not being assumed that unanimity is a necessary condition for a public sector proposal to be enacted.) Private goods are produced by price-taking, profit maximizing producers using convex technologies, and are traded across regions. A continuum of price-taking, utility maximizing consumers, who are perfectly mobile across regions, treat parametrically the public sector proposals of the various local governments in deciding where to live. There are a finite number of different types of consumers, with type defined by a consumer’s preferences, initial endowments, and share of private sector profits. A feasible allocation is a specification of a partition of the consumers among the regions, a vector of technically feasible public good provisions (and an associated vector of private good inputs used in its production) for