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Envy-free Pricing for Impure Public Good

Takuya Obara, Shuichi Tsugawa and Shunsuke Managi

No 69, CCES Discussion Paper Series from Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University

Abstract: In this paper, we study optimal public good provision with congestion and user fees to exclude some agents under lump-sum tax/transfer, constrained by the condition of reduction of envy. We adopt the λ envy-free constraint proposed by Diamantaras and Thomson (1990), and employ the exclusion technique used in Hellwig (2005), i.e., the policymaker decides the level of provision and user fee paid by people accessing a public good, as well as a uniform level of tax/transfer. We characterize the optimal public sector pricing rule that depends on utilitarian distributive concerns and envy reduction concerns, which are in conflict with each other. We show that if the social welfare function is strictly increasing and strictly concave and the government is not concerned with reducing envy, the user fee is greater than the marginal congestion cost. Additionally, we show that if the government reflects the notion of equality of opportunity under the reduction of envy, the user fee is lower than the marginal congestion cost. These results imply that the two fairness concerns are countervailing with regard to the surcharge fee.

Keywords: Public sector pricing; λ envy-free; public good; excludability; congestion (search for similar items in EconPapers)
JEL-codes: D61 D63 H21 H41 H44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2019-03
Note: This work was supported by a Grant-in-Aid for Specially Promoted Research from the Japan Society for the Promotion of Science [grant number 26000001] and by the 4th Environmental Economics Research Fund of the Japanese Ministry of Environment
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