Toward an Efficiency Rationale for the Public Provision of Private Goods
This paper shows that public provision of private goods may be justified on pure efficiency grounds in an environment where individuals consume both public and private goods. The government's involvement in the provision of private goods provides it with information about individuals' private good purchases that facilitates more efficient revenue extraction for the provision of public goods. We show that public provision of the private good improves economic efficiency under a condition that is always fulfilled under stochastic independence and satisfied for an open set of joint distributions. Our model is an example where there is efficiency loss from separating revenue and expenditure problems in public finance, and is therefore of more general interest for the study of optimal taxation.
We thank Bill Zame as well as many seminar and conference participants for helpful comments. All remaining errors are ours. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.