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Optimal Allocation of Public Goods: A Solution to the "Free Rider" Problem
Theodore Groves
John Ledyard
Abstract
This paper presents a general equilibrium model in which private commodities are allocated through competitive markets and public commodities according to government allocation and taxing rules that depend on information communicated to the government by consumers regarding their preferences. A wide range of strategic behavior for consumers in their communication with the government is allowed; in particular, consumers may understate their preferences and be "free riders" if they choose. Although several examples of allocation-taxation schemes falling within the general model are discussed, the major contribution of the paper is the formulation of a particular government allocation-taxation scheme for which the behavioral equilibria are Pareto optimal. That is, given the government rules, consumers find it in their self-interest to reveal their true preferences for public goods.
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