Pareto Improving Interventions in a General Equilibrium Model with Private Provision of Public Goods

Abstract

Most of the literature on government intervention in models where public goods are provided through voluntary contributions focuses on interventions that change the total level of a public good, which is known to be (almost always) underprovided relative to the "efficient" level. However, increases in the public good level need not always benefit all with respect to the private provision equilibrium outcomes. It is evident that interventions that increase the welfare level of all involved will be more desirable from a public policy implementation point of view. In this paper, we take a direct approach to welfare properties of private provision equilibria for public goods in a full blown general equilibrium and study interventions that have the goal of Pareto improving on the private provision ("market") outcome. Specifically, we study two types of policies that typically achieve that aim: (i) along with private firms, the government produces the public good, using one of the available technologies and financing input costs by taxes on households; (ii) taxes are imposed on firms and households.

Keywords: general equilibrium, public goods, Pareto improving interventions

JEL Classification: H41, H49, H50