Private provision of public good and endogenous income inequality
Indian Institute of Technology Delhi
4th August, 2016 (Thursday) at 3:00 PM
Venue : Seminar Room (First Floor)
Department of Economics, Delhi School of Economics
All are cordially invited
In traditional models of public goods with voluntary provision (as like, Bergstrom, Blume and Varian, 1986), size of the non-contributing set does not affect the aggregate level of provision. A transfer of resources from the contributor to the non-contributor without changing their size, unambiguously lowers the aggregate level of provision. Also, aggregate provision level increases with the aggregate wealth level of the contributing set. In this paper, we show that these results are vulnerable to a simple extension of traditional public goods model including production. Agents hold both capital and labour as resources and income inequality is endogenously determined in the model. An increase in the size of the poor people (non-contributor), always raises the aggregate level of provision and welfare. This also aggravates income inequality. With redistribution, aggregate provision level of the public good might go up even when aggregate wealth of the contributing set decreases. A government that taxes rich (net of their contributions) and redistribute the revenue to the poor, unambiguously raises the aggregate provision level. These results are derived using a general equilibrium structure with two types of agents – rich and poor, and with capital and labour as factors of production.