Consumers’ Heterogeneity, Publicness of Goods and the Size of Public Sector

This article studies the relationship between the level of consumers’ inequality (or heterogeneity) and the size of government for the case of an impure public good. It is shown that the size of redistribution (represented by the level of subsidy provided to the firm) increases with the publicness of the good but may decrease with the level of consumers’ inequality. Under the assumption of Nash bargaining between consumers and producers with respect to the level of subsidy, it is also shown that the actual size of government will be inefficiently small if the level of inequality is relatively low but can be inefficiently large (implying that the good will be overproduced in equilibrium) if the level of inequality is relatively low and the publicness of the good is high enough.