Optimal Provision Of Public Goods Research Articles

All or nothing: State capacity and optimal public goods provision

We study public goods provision subject to ex post incentive and participation constraints. We also impose a requirement of anonymity. Different public goods can be bundled if sufficient resources are available. The analysis focuses on the all-or-nothing-mechanism: Expand provision as much as is resource feasible if no one vetoes - otherwise stick to the status quo. We show that the probability of the all-outcome converges to one as the capacity becomes unbounded. For a given finite capacity, we provide conditions under which the all-or-nothing-mechanism is ex ante welfare-maximizing - even though, ex post, it involves an overprovision of public goods.

Envy-Free Pricing for Impure Public Good

In this paper, we study optimal public good provision with congestion and user fees to exclude some agents under lump-sum tax/transfer, constrained by the condition of reduction of envy. We adopt the λ envy-free constraint proposed by Diamantaras and Thomson(1990), and employ the exclusion technique used in Hellwig(2005), i.e., the policymaker decides the level of provision and user fee paid by people accessing a public good, as well as a uniform level of tax/transfer. We characterize the optimal public sector pricing rule that depends on utilitarian distributive concerns and envy reduction concerns, which are in conflict with each other. We show that if the social welfare function is strictly increasing and strictly concave and the government is not concerned with reducing envy, the user fee is greater than the marginal congestion cost. Additionally, we show that if the government reflects the notion of equality of opportunity under the reduction of envy, the user fee is lower than the marginal congestion cost. These results imply that the two fairness concerns are countervailing with regard to the surcharge fee. Furthermore, by numerical computation, we observe that both provision level of the public good and its user fee decrease as the intensity of envy increases under the binding ethical constraint.

Public good provision mechanisms and reciprocity

This paper determines optimal public good provision mechanisms in an environment where agents are motivated by reciprocity. In a two-agent economy, we show that the standard pivot mechanism is not strategy-proof if at least one agent cares strongly enough about reciprocity. Truthful reporting maximises a player’s own payoff and hence is viewed as selfish by his opponent, who retaliates by understating demand for the public good. Incentive compatibility is restored if the mechanism is implemented sequentially. When agents are asked to report their demands in turn, a high report by the first mover (he) may result in him paying an unfairly large share of the provision cost, should the second mover (she) understate her demand. Hence, truthful reporting is not judged as selfish by the second mover, who reciprocates by stating her true demand. Our results alert the institutional designer to the importance of game dynamics when agents are non-selfish.

The marginal cost of public funds is one at the optimal tax system

This paper develops a Mirrlees framework with skill and preference heterogeneity to analyze optimal linear and nonlinear redistributive taxes, optimal provision of public goods, and the marginal cost of public funds (MCF). It is shown that the MCF equals one at the optimal tax system, for both lump-sum and distortionary taxes, for linear and nonlinear taxes, and for both income and consumption taxes. By allowing for redistributional concerns, the marginal excess burden of distortionary taxes is shown to be equal to the marginal distributional gain at the optimal tax system. Consequently, the modified Samuelson rule should not be corrected for the marginal cost of public funds. Outside the optimum, the marginal cost of public funds for distortionary taxes can be either smaller or larger than one. The findings of this paper have potentially important implications for applied tax policy and social cost–benefit analysis.

All or Nothing: State Capacity and Optimal Public Goods Provision

We study the provision of public goods. Different public goods can be bundled provided there is enough capacity, i.e. resources to pay for all the public goods in the bundle. The analysis focuses on the all-or-nothing-mechanism: Expand provision as much as resource feasible if no one vetoes - otherwise stick to the status quo. We show that the probability of the all-outcome converges to one as the capacity becomes unbounded. We also provide conditions under which the all-or-nothing-mechanism is ex ante welfare-maximizing - even though, ex post, it involves an overprovision of public goods.

The Samuelson condition and the Lindahl scheme in networks

We study optimal provision of public goods in the network, showing that the Samuelson condition and the Lindahl scheme can both be substantially extended to characterize the expenditure on such public goods. Couched in terms of the structure of the network, the extended Samuelson condition and Lindahl scheme formulate precisely how the local publicness of a local public good fundamentally determines its optimal provision and the personalized price that the Lindahl tax-payer faces. Independence of the optimal allocation from the distribution of resources at interior Samuelsonian solutions in the network generally fails to hold even for the Bergstrom-Cornes preferences.

Wallace E. Oates Outstanding Doctoral Dissertation Award

Previous articleNext article FreeWallace E. Oates Outstanding Doctoral Dissertation AwardPDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreEach spring, AERE invites outstanding doctoral dissertation nominations from dissertation chairs for their students completing the doctoral degree in the previous calendar year. Dissertations are judged by a panel of AERE members who emphasize originality of research, quality of implementation, and expositional clarity, along with intellectual and practical significance of research findings. The winner receives a cash prize plus assistance in travel funding to attend the next AERE luncheon at the January ASSA meetings for public recognition. Finally, the winner’s dissertation abstract appears in JAERE.We are pleased to announce that Casey J. Wichman is the recipient of the 2015 Wallace E. Oates Outstanding Doctoral Dissertation Award. Wichman graduated in 2015 from the University of Maryland with a PhD in Agricultural and Resource Economics. His dissertation committee was cochaired by Roberton Williams and Maureen Cropper.Information and Environmental PolicyCasey J. WichmanAbstract: The role of information in economic policy has evolved drastically in the 50 years since Stigler’s seminal article on “the economics of information” (Stigler 1961). And yet, in the context of consumer behavior, many interesting questions remain unanswered on the value of information, how it is used in decision making, and precisely how it is ignored. Questions of particular interest encompass the degree to which consumers utilize price information in decision making, whether individuals confronted with changes in the frequency of information received behave as economic models predict, and the value of private information in a regulatory context. While these questions are inherently general, the focus of this research is to address the role of information with applications to environmental and resource economics.Within this manuscript, I present three distinct essays linked by the commonality of how information is utilized in decision making and its effect on environmental policy.In the first essay (Wichman 2014), I evaluate the price to which consumers respond under complicated billing structures. I exploit a natural experiment to estimate a causal effect of price for residential water customers during the introduction of increasing block rates for a North Carolina utility. Perceived price is identified through a billing anomaly in which changes in marginal and average prices move in opposite directions. Empirical results contribute evidence that residential water customers respond to average price. Average price elasticity estimates vary from −0.43 to −1.14 across the distribution of consumption in triple-difference models, with an estimate of −0.31 in the tightest bandwidth of regression discontinuity specifications.In the second essay (Wichman 2015), I examine a causal effect of billing frequency on consumer behavior. I exploit a natural experiment in which residential water customers transitioned exogenously from bimonthly to monthly billing. I find that customers increase consumption by approximately 5% in response to more frequent information. This result is reconciled in a model of price and quantity uncertainty, where increases in billing frequency reduce the distortion in consumers’ perceptions. Using treatment effects as sufficient statistics, I calculate gains in consumer surplus equivalent to 0.5%–1% of annual water expenditures. Heterogeneous treatment effects suggest increases in outdoor water use.And, in the final essay (Wichman 2016), I consider the role of heterogeneous green preferences for private provision of environmental public goods in an asymmetric information context. Under varying degrees of information available to a regulator, I characterize equilibrium properties of several mechanisms. I find incentive compatible Nash equilibria that provide socially optimal public goods provision when the regulator can enforce individual consumption contracts, as well as when reported consumption contracts are supplemented with group penalties. The role of budget balancing is recast as a policy intervention for correcting environmental market failures. Notes Casey J. Wichman is at Resources for the Future, 1616 P Street NW, Washington, DC 20036 ([email protected]).ReferencesStigler, George J. 1961. The economics of information. Journal of Political Economy 69 (3): 213–35.First citation in articleLinkGoogle ScholarWichman, Casey J. 2014. Perceived price in residential water demand: Evidence from a natural experiment. Journal of Economic Behavior and Organization 107:308–23.First citation in articleCrossrefGoogle Scholar———. 2015. Information provision and consumer behavior: A natural experiment in billing frequency. Discussion paper 15-35, Resources for the Future, Washington, DC.First citation in articleGoogle Scholar———. 2016. Incentives, green preferences, and private provision of impure public goods. Journal of Environmental Economics and Management 79:208–20.First citation in articleCrossrefGoogle Scholar Previous articleNext article DetailsFiguresReferencesCited by Journal of the Association of Environmental and Resource Economists Volume 4, Number 1March 2017 Published for the Association of Environmental and Resource Economists Article DOIhttps://doi.org/10.1086/690613 © 2017 by The Association of Environmental and Resource Economists. All rights reserved.PDF download Crossref reports no articles citing this article.

Incentives, green preferences, and private provision of impure public goods

Pro-environmental preferences are being used increasingly in environmental policy. In this paper, I consider the role of heterogeneous green preferences for private provision of environmental goods that have both private and public characteristics. Under different assumptions of information available to a regulator, I characterize equilibrium properties of several mechanisms. I find incentive-compatible Nash equilibria that provide socially optimal public goods provision when the regulator can enforce individual consumption contracts, as well as when reported consumption contracts are supplemented with group penalties. Throughout the paper, I ground the exposition with examples of consumer behavior in the context of green electricity programs and goal setting for energy conservation.

ENVIRONMENTAL SUSTAINABILITY AND THE GREENED SAMUELSON RULE

AbstractThe purpose of this paper is to investigate the implementation of green government spending as an effective instrument for enhancing both environmental sustainability and economic efficiency. Utilizing a model with two types of households examined in the optimal taxation literature, this paper analyzes the impact of green spending, the properties of optimal tax rates, and the optimal provision of the public good. We derive a modified greened version of the Samuelson rule, that is, the optimal provision of the public good in connection with environmental sustainability. Our results indicate that the overall effect of green spending measured in terms of government revenue is subject to several factors such as the influence of green spending on environmental sustainability, the cost of green spending, pollution effects, and so on. To determine the optimal provision of public goods, the aforementioned factors have to be taken into account. For instance, if the pollution effect is stronger, the individual marginal effective tax rate and the commodity tax rate on the polluting good will increase to discourage the demand for consuming polluting commodities.

Incentives, Green Preferences, and Private Provision of Impure Public Goods

Pro-environmental preferences are being used increasingly as environmental policy tools. In this paper, I consider the role of heterogeneous green preferences for private provision of environmental goods that have both private and public characteristics. Under different assumptions of information available to a regulator, I characterize equilibrium properties of several mechanisms. I find incentive-compatible Nash equilibria that provide socially optimal public goods provision when the regulator can enforce individual consumption contracts, as well as when reported consumption contracts are supplemented with group penalties. The role of budget balancing is recast as a policy intervention for correcting environmental market failures. Throughout the paper, I ground the exposition with examples of consumer behavior in the context of green electricity programs and goal setting for energy conservation.

Political geography and income inequalities

We analyze political geography and the size of governments in the presence of income inequality. The social planner solution implies that income inequality is neutral on the size of countries but reduces the optimal provision of public goods within each country. Under additional conditions, a politico-economic equilibrium geography is characterized by suboptimal size of nations, but there may not be a stable equilibrium when inequality is high enough. Finally, we introduce globalization showing that inequality can increase the size of countries, reduce public good provision and, at the same time, decrease their degree of openness.

Devolution, independence, and the optimal provision of public goods

This paper examines whether two regions should remain together within a fiscal federation, or separate, when their inhabitants have different preferences for publicly provided goods. The paper focuses on trade-offs between returns to scale in the provision of the goods, and the scope to tailor provision to the tastes of the inhabitants in each region. A general model is developed that includes, as special cases, both pure public and publicly provided goods, and regional and national public goods. We show that when there is a choice between public investment and consumption goods, there will, in general, be a bias against public consumption goods unless taxing powers are fully devolved. We provide conditions under which independence may be desirable even when the region contemplating independence is relatively small.

The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation

We characterize the Pareto-frontier in a simple Mirrleesian model of income taxation. We show how the second-best frontier, which incorporates incentive constraints due to private information on productive abilities, relates to the first-best frontier, which takes only resource constraints into account. In particular, we argue that the second-best frontier can be interpreted as a Laffer-curve. We also use this second-best frontier for a comparative statics analysis of how optimal income tax rates vary with the degree of inequity aversion, and for a characterization of optimal public-good provision. We show that a more inequity-averse policy maker chooses tax schedules that are more redistributive and involve higher marginal tax rates, while simultaneously providing less public goods.* I. Introduction In this paper we characterize the set of Pareto-efficient allocations in a simple version of the MIRRLEES [1971] model of optimal nonlinear income taxation. We consider an economy where there are two types of individuals who differ in their productive abilities. Individuals have a linear effort cost, so that an individual’s marginal cost of contributing to the economy’s output is low if the individual is high-skilled and high if the individual is low-skilled. 1 We obtain the following results. First, we show how the second-best Pareto-frontier compares to the first-best Pareto-frontier in a model in which information about productive abilities is publicly observed. The first-best frontier is linear and there is neither a maximal, nor a minimal utility level for high-skilled or low-skilled individuals. With the second-best Pareto-frontier, by contrast, such maxima and minima exist. Moreover, we show that each point on the second-best Pareto-frontier is associated with a marginal income tax rate for low-skilled individuals, and a marginal income tax rate for high-skilled individuals. Both marginal tax rates are shown to be non-decreasing functions of the utility of the low-skilled individuals. The fact that there is a minimum of utility for the high-skilled individuals implies that the second-best frontier is similar to a Laffer-curve: 2 if the high-skilled individuals’ utility level fell below the minimal level, then an increase in their utility level would also make the low-skilled individuals better off. Moreover, the minimal utility level of the high-skilled individuals is

The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation

We characterize the Pareto-frontier in a simple Mirrleesian model of income taxation. We show how the second-best frontier which incorporates incentive constraints due to private information on productive abilities relates to the first-best frontier which takes only resource constraints into account. In particular, we argue that the second-best frontier can be interpreted as a Laffer-curve. We also use this second-best frontier for a comparative statics analysis of how optimal income tax rates vary with the degree of inequity aversion, and for a characterization of optimal public-good provision. We show that a more inequity averse policy maker chooses tax schedules that are more redistributive and involve higher marginal tax rates, while simultaneously providing less public good.

Optimal Provision of Public Goods: A Synthesis*

AbstractThe standard approach to the optimal provision of public goods highlights the importance of distortionary taxation and distributional concerns. A new approach neutralizes distributional concerns by adjusting the income tax schedule. We demonstrate that both approaches are derived from the same basic formula. We also take the new approach further by deriving an intuitive formula for the optimal level of public goods, without imposing strong assumptions on preferences. This formula shows that distortionary taxation has a role to play, as in the standard approach. However, the main determinants of optimal provision are different, and the modified Samuelson rule is likely to lead to underprovision.

Government and the provision of public goods:from equilibrium models to mechanismdesign

This paper investigates to what extent the seminal contribution of Samuelson has been or not incorporated by the theories of general equilibrium and mechanism design in their analysis of optimal public good provision, and more generally of optimal public policy. Our conclusion is that, far from taking up the challenges raised by Samuelson's contribution, both paradigms lead to the negative conclusion of the impossibility of a fully decentralized optimal public goods provision through market or market-like institutions, without giving a key for (re)defining the role of state in market economies.

Optimal Income Taxation and Public-Goods Provision with Preference and Productivity Shocks

We study how an optimal income tax and an optimal public-goods provision rule respond to preference and productivity shocks. It is shown that a conventional Mirrleesian treatment of this problem will provoke manipulations of the policy mechanism by individuals with similar interests. We therefore extend the Mirrleesian model so as to include collective incentive compatibility constraints. As a main result, it is shown that an optimal policy mechanism which respects these constraints gives rise to a positive correlation between the public-goods provision level, the extent of redistribution and marginal income tax rates.

Using Neural Measures of Economic Value to Solve the Public Goods Free-Rider Problem

Every social group needs to decide when to provide public goods and how to allocate the costs among its members. Ideally, this decision would maximize the group's net benefits while also ensuring that every individual's benefit is greater than the cost he or she has to pay. Unfortunately, the economic theory of mechanism design has shown that this ideal solution is not feasible when the group leadership does not know the values of the individual group members for the public good. We show that this impossibility result can be overcome in laboratory settings by combining technologies for obtaining neural measures of value (functional magnetic resonance imaging-based pattern classification) with carefully designed institutions that allocate costs based on both reported and neurally measured values.

Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy

This paper explores the implications of the interaction between interregional tax competition and intraregional political competition for the optimal provision of public goods under representative democracy à la Osborne and Slivinski (1996) and Besley and Coate (1997). As an extension of Hoyt’s (1991) finding that intensified tax competition is always harmful and aggravates the extent to which public goods are undersupplied in a region, we show that intensified tax competition can be beneficial if political as well as tax competition is considered. In particular, we identify plausible conditions under which (i) there is an optimal intensity of tax competition such that the interaction between interregional tax competition and intraregional political competition will result in the optimal provision of public goods and (ii) intensified tax competition will be beneficial if and only if the degree of tax competition is less than this optimal intensity.

A Note on the Valuation of Collective Goods: Overlooked Input Market Free Riding for Non-Individually Incrementable Goods

Abstract For at least fifty years economists have argued that vertically-aggregated marginal willingness to pay, when set equal to marginal provision cost, will result in optimal public good provision levels. This methodological approach would be expected to yield an exact analog, in terms of optimal levels of public good provision, to efficient provision of private goods in a perfect market setting. There is, however, a potentially serious flaw in the approach as actually practiced, since initial incomes are implicitly–and wrongly–taken to be optimal. From a given income, the output demand revelation problem has long been recognized–that there will be difficulty inferring true demands for public goods at that income (the traditional `free rider' problem). But what has failed to receive widespread recognition among theoreticians, and especially among practitioners, is that there will also be a concomitant `input demand revelation' problem. In any situation where workers cannot individually increment a class of goods by increasing their income (e.g. public goods), they will have no incentive to generate the income that would have been devoted to that class of goods. They will only generate income that is optimal to pay the higher taxes or prices associated with whatever initial public goods levels are provided. As a consequence, the benefit-cost practitioner will, even if somehow able to accurately guess marginal willingness-to-pay out of current income, observe only one apparent optima. There are an infinite number of such optima, one for each level of free riding in input markets, where aggregated marginal willingness-to-pay will appear to equal marginal provision cost. The one true Samuelson `optimum optimorum' occurs when there is free riding in neither output nor input markets (that is, when the `full' demand revelation problem is solved). As a consequence, pure public goods, as well as other `non-incrementable' goods and goods for which non-use values are of importance will be undervalued, hence under-provided. Evidence is presented that the problem raised here might be of importance, undermining the practical significance of the Coase theorem vis-à-vis Pigouvian taxation.