At the new point, A, person 1’s burden ratio declines thus, her or his utility may increase because she or he may enjoy public goods at a lower burden ratio. ![]() Thus, the Lindahl equilibrium point moves from L to A. Then, her or his revealed reaction curve moves to the left in this figure. 11.8, if person 1 does not reveal her or his true preference and intends to avoid her or his burden, she or he is likely to reveal a smaller level of public goods than her or his optimal level k(h) at a given h. This type of free riding behavior can occur in the Lindahl equilibrium.Īs shown in Fig. By reducing their demand for public goods intentionally so that it is less than true demand, such agents can reduce their burden. Agents may have an incentive not to reveal their true preferences because by underreporting their preferences, they can avoid the burden of public goods and still enjoy the benefit of public goods. The free rider problem can occur even in the Lindahl mechanism when agents do not reveal their true preferences. 11.8 The Lindahl equilibrium and free riding The corner solution of the Nash equilibrium is likely to occur if preferences on public goods diverge and/or income inequality is significant among agents.įig. Since public goods are non-excludable, even if she or he does not contribute at all, she or he can still enjoy the benefit. With regard to the Nash equilibrium, if an agent does not pay anything at the equilibrium, she or he free rides on others’ provisions. ![]() First, we explain the free rider outcome when agents reveal their true preferences. “Free riding” means that agents enjoy the benefit of public goods without paying the burden. If not, then the government has to deal with the free rider problem. ![]() This is true as long as agents honestly report their true preferences to the government. By so doing, the government can always attain the Pareto optimum at the Lindahl equilibrium. The government can find the Lindahl equilibrium by raising the burden ratio of agents who want to demand more public goods than others. The Lindahl equilibrium has the desirable property of attaining the Pareto optimum.
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