Monopolistic Competition and Public Good Provision with By‐Product Firms

Abstract

I develop a model in which the voluntary contributions mechanism for the provision of public goods totally breaks down in a large society. A by‐product firm sells a private good and uses its profits to provide a public good. By‐product firms compete with for‐profit firms in a monopolistically competitive industry. If the number of by‐product firms is proportional to the size of the society, then public good provision rises without bound as the society grows large. This stands in strong contrast to the results under the voluntary contributions mechanism.