Lindahl Equilibrium

What is Lindahl balance?

Lindahl equilibrium is a state of equilibrium in a quasi-market for a pure public good. Like a competitive market equilibrium, the supply and demand for the good are balanced, in addition to the cost and income to produce the good. Lindahl’s equilibrium depends on the possibility of setting up an effective Lindahl tax, first proposed by the Swedish economist Erik Lindahl.

Key points to remember

  • Lindahl equilibrium is a theoretical state of an economy where the optimal amount of public goods is produced and the cost of public goods is distributed equally among all.
  • Achieving Lindahl balance requires the implementation of a Lindahl tax which charges each individual an amount proportional to the benefit they receive.
  • The Lindahl equilibrium is a theoretical construction because various theoretical and practical questions prevent the effective implementation of an effective Lindahl tax.

Understanding Lindahl balance

At Lindahl equilibrium, three conditions must be met: each consumer requires the same amount of public good and therefore agrees on the quantity to be produced, the consumers each pay a price (called Lindahl tax) according to the advantage marginal they receive, and the total tax revenue covers the total cost of providing the public good. Achieving Lindahl balance requires the establishment of a Lindahl tax.

A Lindahl tax is a type of tax proposed by the Swedish economist Erik Lindahl in 1919, in which individuals pay for the provision of a public good based on the marginal benefit they receive, in order to determine the level efficient supply for each public good. In a state of equilibrium, all individuals consume the same amount of public goods but will be faced with different prices under the Lindahl tax because some people can value a particular good more than others.

According to this paradigm, the relative share of each individual in total tax revenue is proportional to the level of personal utility from which he benefits in a public good. In other words, the Lindahl tax represents an individual share of the collective tax burden of a given economy. The actual amount of tax paid by each individual is this proportion multiplied by the total cost of the property.

The equilibrium quantity will be the amount which equates the marginal cost of the good to the sum of the marginal benefits for consumers (in monetary terms). The Lindahl price for each individual is the resulting amount paid by an individual for their share of the public good. Lindahl prices can thus be viewed as individual shares of the collective tax burden of an economy, and the sum of Lindahl prices equals the cost of providing public goods – such as national defense and other common programs and services. – which collectively benefit a company.

Problems with the Lindahl tax

Lindahl equilibrium has more of a philosophical application than practical use due to various problems which restrict the real world function of Lindahl equilibrium. Due to the impossibility of actually implementing a Lindahl tax to achieve the Lindahl balance, other methods such as surveys or majority voting are normally used to decide on the supply and financing of public goods.

In order to implement a Lindahl tax, the tax authority must know the exact shape of the consumer demand curve for each public good. However, without a market for the good, consumers have no way of communicating what these demand curves look like. Since it is not possible to assess how much each person values ​​a certain good, the marginal benefit cannot be aggregated to all individuals.

Even if consumers could communicate their preferences and the tax authority could group them, consumers might not even be aware of their own preferences for a given public good, or how much they appreciated it, depending on whether, how much or to what extent. frequency a given consumer actually consumes the public good.

Even if consumer preferences are known, communicated and aggregated, they may not be stable at the individual or global level. Estimates of consumer demand curves may need to be continuously updated to adjust both the total quantity of each public good produced and the rate charged to each individual.

Problems with the fairness of a Lindahl tax have also been raised. The tax invoices each individual an amount equal to the benefit he derives from the property. For some public goods, such as social safety nets, this obviously makes no sense. For example, social assistance recipients should be taxed at least equal to the transfer payments they receive, which would appear to run counter to the objective of the program.

It may also happen that certain consumers receive a negative utility from a given public good and that providing them actually causes them harm. For example, a devout pacifist who deeply opposes the very existence of an armed army for national defense. A Lindahl tax for this individual would necessarily be negative. This would lead to a lower equilibrium amount (since total demand is lower) and a higher Lindahl price for all other members of society (since total income required would include the price of “buying” the pacifist. ).

In the extreme, it could even lead to a case where a small minority group or even a single individual with strongly contrary preferences could completely prevent the production of a given public good, whatever the benefit for the rest of society. , if the price to buy them is higher than the amount others are willing to pay. In this case, it might make more sense to simply ignore the interests of the Contrarian minority, divide the political body according to preferences for public goods, or physically remove the Contrarian minority from the economy.

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