As noted above, because individuals’ willingness to pay is private information, it is difficult to determine whether or not, and if so, how much, of a public good or service should be provided. Researchers and policy makers have, as a result, devised a number of tools for assessing the value of what we will call public provision. In this chapter, we will consider a specific mechanism for determining:
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- The answer to the yes or no question of whether to go ahead with a public project.
- The correct amount of a public good or service to provide in cases where this is relevant.
The mechanism we study will involve the use of taxes or fees in order to give households incentive to reveal their willingness-to-pay, either to have the good at all or to have more of it at the margin, truthfully. Importantly, the role of these taxes, as we will see, is not to fund the provision of public goods. In particular, we will separate the following two questions:
• Should a public good or service should be supplied, and if so in what quantity? • How should the provision of the good be funded?
3.The reason for this is that, as we saw earlier, charging for use of a public good typically results in inefficient exclusion. For now, we will assume that government provision of public goods is financed by a lump-sum tax. These taxes are generally non-distorting in the sense that they do not change prices and result in changes to agents’ decisions regarding the relative quantities of different goods and services that they consume. Note that the is very different from a Pigouvian tax, which is designed to affect prices and change incentives. The taxes/fees that we will consider here are, in this sense, like Pigouvian taxes.