Lindahl tax

A Lindahl tax is a form of taxation conceived by Erik Lindahl in which individuals pay for public goods according to their marginal benefits. In other words, they pay according to the amount of satisfaction or utility they derive from the consumption of an additional unit of the public good. Lindahl taxation is designed to maximize efficiency for each individual and provide the optimal level of a public good.

History[edit]

The idea of using aggregate marginal utility in the analysis of public finance was not new in Europe. Knut Wicksell was one of the most prominent economists who studied this concept, eventually arguing that no individual should be forced to pay for any activity that does not give them utility.^[2] Erik Lindahl was deeply influenced by Wicksell, who was his professor and mentor, and proposed a method for financing public goods in order to show that consensus politics is possible. As people are different in nature, their preferences are different, and consensus requires each individual to pay a somewhat different tax for every service, or good that he consumes. If each person's tax price is set equal to the marginal benefits received at the ideal service level, each person is made better off by provision of the public good and may accordingly agree to have that service level provided.

There is a fixed budget B, and k types of divisible public goods.

The goal is to decide on an allocation x of the budget, such that x₁+...+x_k = B.

There are n agents; each agent i has a utility function U_i over possible allocations of the budget.

α*P_(public)/P_(else) = MRS_(person1)

We assume that there are two goods in an economy:the first one is a "public good", and the second is "everything else". The price of the public good can be assumed to be P_public and the price of everything else can be P_else. Person 1 will choose his bundle such that:

This is just the usual price ratio/marginal rate of substitution deal; the only change is that we multiply P_public by α to allow for the price adjustment to the public good. Similarly, Person 2 will choose his bundle such that:

Now we have both individuals' utility maximizing. We know that in a competitive equilibrium, the marginal cost ratio or price ratio should be equal to the marginal rate of transformation, or

Benefit principle

Public choice theory

Public finance

Samuelson condition

Value capture

(1970), "Lindahl's Solution and the Core of an Economy with Public Goods" (PDF), Econometrica, 38 (1): 66–72, doi:10.2307/1909241, hdl:1721.1/63828, JSTOR 1909241.

Foley, Duncan K.

"Public Economics" by Gareth D. Myles (October 2001)

(1988). "2.4 Lindahl equilibrium, 2.5.3 Majority voting or the law of the median voter". Fundamentals of public economics. MIT. pp. 41–43, 51–53. ISBN 978-0-262-12127-9. {{cite book}}: External link in |publisher= (help)

Laffont, Jean-Jacques

Lindahl, Erik (1958) [1919], "Just taxation – A positive solution", in Musgrave, R. A.; Peacock, A. T. (eds.), Classics in the Theory of Public Finance, London: Macmillan.

Salanié, Bernard (2000). "5.2.3 The Lindahl equilibrium". Microeconomics of market failures (English translation of the (1998) French Microéconomie: Les défaillances du marché (Economica, Paris) ed.). Cambridge, MA: MIT Press. pp. 74–75. 978-0-262-19443-3.

ISBN

Starrett, David A. (1988). . Foundations of public economics. Cambridge economic handbooks. Vol. XVI. Cambridge: Cambridge University Press. pp. 65–72, 270–71. ISBN 9780521348010.

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