COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1830 Financing of Public Goods through Taxation in a General
Equilibrium Economy: Juergen Huber, Martin Shubik, and Shyam Sunder October 2011 We compare general equilibrium economies in which building and
maintenance of a depreciating public facility is financed either by anonymous voluntary
contributions or by taxing agents on their income from private production. Agents start
with an endowment of private goods and money, while the government starts with an
endowment of public good and money. All private goods produced are tendered for sale in
exchange for money in a sell-all market mechanism. Agents' proceeds from sale are taxed,
and they individually allocate their private goods between current consumption and
investment in production for the following period. The optimal levels of supply of the
public good, and tax rate to sustain it over time, are defined and calculated for infinite
and finite horizons. These equilibrium theoretical predications are compared to the
outcomes of laboratory economies when (1) the starting public facility is either at or
below the optimal level; and (2) the tax rate is either exogenously set at the optimal
level, or at the median of rates proposed by individual agents. We find that the
experimental economies sustain public goods at about 70-90 percent of the infinite horizon
but considerably more than the finite horizon optimum. Payoffs (efficiency) is at 90
percent of the infinite horizon equilibrium level even when the rate of taxation is
determined by voting. Starting conditions play only a minor role for outcomes of the
economies, as efficiency and the stock of public good adjusts to about the same level
irrespective of the starting level. These results contrast with rapid decline in provision
of public goods under anonymous voluntary contributions, and point to the possibility that
the social institution of government enforced taxation may have evolved to address the
problem of under-production of public goods through anonymous voluntary contributions. |
