Valuation of public goods: an intertemporal mixed demand approach
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Valuation of public goods: an intertemporal mixed demand approach H. Youn Kim1 · Keith R. McLaren2 · K. K. Gary Wong3 Received: 18 May 2017 / Accepted: 8 May 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract This paper presents a new mixed demand model for measuring the value of public goods in an intertemporal optimization framework. From the specification of an indirect utility function allowing for public goods, direct demand functions for private goods are derived and estimated jointly with the Euler equation for intertemporal consumption behavior, using US data. This allows us to identify the marginal utility of private consumption and to obtain the inverse demand or shadow price of a public good, which is then related to its observed price to assess whether the public good is efficiently provided. There is evidence, though suggestive, that the public good as measured by national defense in the USA has been inefficiently provided over the past decades. Keywords An indirect utility function · Mixed demand system · Public goods · Efficiency condition · The Euler equation JEL Classification D12 · H41 · E21
The authors would like to thank the referees for helpful comments and suggestions to improve the paper. * H. Youn Kim [email protected] Keith R. McLaren [email protected] K. K. Gary Wong [email protected] 1
Department of Economics, Western Kentucky University, Bowling Green, KY 42101, USA
2
Monash Business School, Monash University, Clayton, VIC 3800, Australia
3
Department of Economics, FSS, The University of Macau, Taipa, Macau SAR, China
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1 Introduction Estimation of a demand function for public goods has been a long-standing interest in studies of the public sector (see Bergstrom and Goodman 1973; Perkins 1977; Gibson 1980; Bergstrom et al. 1982; Hewitt 1985).1 These studies typically treat public goods as private goods under the implicit assumption that consumers adjust their demands to changes in the price of public goods. However, public goods have properties that are markedly distinct from private goods. Private goods are rival in consumption and excludable. For private goods, consumers are assumed to face the same price, which is usually predetermined, but consume different quantities of goods. Public goods are, on the other hand, characterized by non-rival consumption and non-excludability. The quantities of most public goods are, to a large extent, determined by the political process2 and consumers jointly consume the same quantity but with different willingness to pay, which is typically a different amount than is paid through taxes, with each amount depending on their income levels in different ways. If public goods are efficiently provided, then their prices as implied by taxes should truly reflect the consumer’s marginal willingness to pay for these goods. Given that public goods, unlike private goods, are not traded in markets but have implied prices, a central issue at stake in empirical analysis is a prope
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