An Incomplete Contracts Perspective on the Provision and Pricing of Excludable Public Goods
43 Pages Posted: 7 Jan 2010 Last revised: 26 Apr 2010
Date Written: April 2010
We study whether a firm that produces and sells access to an excludable public good should face a self-financing requirement, or, alternatively, receive subsidies that help to cover the cost of public-goods provision. The main result is that the desirability of a self-financing requirement is shaped by an equity-efficiency trade-off: While first-best efficiency is out of reach with such a requirement, its imposition limits the firm's ability of rent extraction. Hence, consumer surplus may be higher if the firm has no access to public funds.
Keywords: Incomplete Contracts, Excludable Public Goods, Regulation
JEL Classification: D82, D86, H41, L51
Suggested Citation: Suggested Citation