Lindahl Equilibrium - Explained
What is a Lindahl Equilibrium?
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Table of ContentsWhat is the Lindahl Equilibrium?How Does the Lindahl Equilibrium Work?Preference Revelation Problem Preference Knowledge Problem Preference Aggregation Problem Academic Research on Lindahl Equilibrium
What is the Lindahl Equilibrium?
A Lindahl tax is a form of taxation that is calculated according to the amount of satisfaction or benefit individuals receive from using an additional unit of the public good. So, the optimal level for producing a public good is the point at which an individual is willing to pay an amount equal to the marginal cost of supplying that good. To produce more than that equilibrium amount means the cost of production is more than value received (and thus the willingness of the consumer of the good to pay).
How Does the Lindahl Equilibrium Work?
Lindahl equilibrium is the method used for finding the equilibrium point for the level of supply against the highest amount consumers are willing to pay for public goods. As expressed by Leif Johansen, the Lindahl equilibrium is the comparison of how much individuals are willing to pay for a particular public good affects their consumption decisions. The theory is applied to public taxation. It centers around benefit taxation as individuals are taxed based on what they think is the benefit received from the provision of public benefits. According to this theory, individuals are prepared to pay taxes for the quantity of public goods received or consumed. Supplying more (or a larger number of) public benefits than an individual is willing to pay results in total benefits of a lower value than individuals are willing to pay. The Lindahl equilibrium is important because it shows how productivity can be achieved in an economy by equating individual appraisal for a public good to the cost of the public good. Despite leading to a systematic provision of public goods, the Lindahl tax has three main problems in implementation.
Preference Revelation Problem
Individuals are prone to lie about and under report their appraisal of the value of a particular good and the benefits derived. This to them paying lower taxes. This tendency of humans is associated with the free rider problem and is not incentive compatible. Though preference revelation mechanisms such as the Vickrey-Clarke-Groves mechanism can be used to solve the issue as it ensures the true value is revealed and that the public good is provided only when it should be, they have been unable to eradicate the problem entirely.
Preference Knowledge Problem
Another problem with the Lindahl solution is that some individuals may honestly have no idea of the value of the public goods they do not interact with on a day to day basis.
Preference Aggregation Problem
Governments may have problem accumulating the marginal willingness to pay of their citizens except if few individuals are affected by the public good.