Habit formation and the Pareto-efficient provision of public goods

Thomas Aronsson and Ronnie Schöb
Authors registered in the RePEc Author Service: Ronnie Schoeb

No 2017/1, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: This paper examines the implications of habit formation in private and public consumption for the Pareto-efficient provision of public goods, based on a two-period model with nonlinear taxation. If the public good supply is time-invariant, the presence of habit formation generally alters the standard rules for public good provision. In contrast, if the public good is a flow-variable such that the government directly decides on the level of the public good in each period, habit formation leads to a modification of the first best Samuelson condition only if the degrees of habituation differ for private and public consumption. Since habit formation affects the incentives to relax the self-selection constraint through public good provision, however, habituation alters the second-best analogue to the Samuelson condition also when the degrees of habituation in private and public consumption coincide.

Keywords: public good provision; Samuelson condition; habit formation; optimal taxation (search for similar items in EconPapers)
JEL-codes: D60 H21 H41 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-mic, nep-pbe and nep-pub
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https://www.econstor.eu/bitstream/10419/149575/1/877809550.pdf (application/pdf)

Related works:
Journal Article: Habit formation and the pareto-efficient provision of public goods (2022)
Working Paper: Habit Formation and the Pareto-Efficient Provision of Public Goods (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:20171

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