Chapter 33 Game theory and public economics

This chapter reviews some areas of public economies where the theory of games has made important contributions. Game theory has been successfully employed in economics whenever the standardprivate goodscompetitive model did not provide an adequate framework for analysis. Public economics is one of these cases. The chapter presents a survey on the problem of allocating pure public goods under conditions of complete information and discusses the controversial issue of local public goods. Local public goods are generally defined as public goods with exclusion. In most instances, the theory suggests that the set of consumers (or players) be partitioned where members of each set in the partition are associated with such objects as jurisdictions, communities, and locations etc., all of which have a spatial character. The chapter addresses the question of income and wealth distribution, which has always been a central problem for economic theory. Given a set of initial property rights of agents, the theory of general competitive equilibrium provides a positive theory for the distribution of income that emerges with prices.