Lindahl equilibrium
Also called: Lindahl pricing · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT
Meaning
Lindahl equilibrium, or Lindahl pricing, is a theoretical way to pay for a public good. Each person pays a tax share equal to their own marginal benefit, which means the value they get from one more unit of the good. People who value the good more pay more, and people who value it less pay less. In theory this gives the efficient amount of the public good. It is a benchmark for judging real policy. It is not a working system.
Example
Suppose a town is building a park. A family with small children values it highly and would pay a larger tax share. A retired person who rarely goes out would pay a smaller one. In practice, the families have a reason to understate how much they value the park so that they pay less. That is the free-rider problem.
Don't confuse with
- Market pricing of private goods: in a market, everyone pays the same price and buys different quantities. Under Lindahl pricing, everyone uses the same quantity of the good and pays different tax shares.
Related concepts
- Allocation function
- Redistribution function
- Stabilisation function
- Public goods
- Private goods
- Non-rivalry
- Non-excludability
- Free-rider problem
- Club goods
- Merit goods