Explain the neutrality of income redistribution in the private provision of pure public goods? How is...

Explain the neutrality of income redistribution in the private provision of pure public goods?

How is it related to perfect crowding out of government provision?

Consider now the private provision of a local public good in a star network with three agents. Find the direction of welfare improving transfer? Find the direction for increasing the aggregate provision?

Compare the two results.

Solutions

Expert Solution

Voluntary contributions by members of a community are vital for the provision of essential social infrastructure, while at the aggregate level charitable giving accounts for a significant proportion of GDP in many countries. With regards to a pure public good, which corresponds to a comprehensive network of interactions, the so-called neutrality result, shows that income redistribution among contributors that does not change the composition of the set of contributors, yields a new equilibrium such that each consumer has precisely the same individual consumption of the private and the public good as he had before. What is remarkable about the neutrality result is that it holds regardless of the form of the preferences. The perception behind it is that after income redistribution each consumer adjusts his public good provision by exactly the amount of the income transfer made to him and leaves unchanged his private good consumption. Since the transfer, being budget balanced, leaves unchanged the aggregate public good provision, it follows that such allocation, with unchanged private and public goods consumption for each consumer, is not only individually optimal but also a Nash equilibrium. If public provision is financed by lump-sum taxation, in view of budget balance it may be simply interpreted as a form of income redistribution, which, being neutral in the case of a pure public good, leaves aggregate provision unchanged. Yet, while the aggregate public good provision coincides with the individual public good consumption enjoyed by each consumer in the case of a pure public good, this may no longer be true when the public good is locally enjoyed. As a consequence, the invariance of aggregate provision is characterized differently from neutrality (invariance of individual private and public good consumption of each consumer) in general networks.

Rahul Sunny answered 1 year ago

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