On the Provision of Excludable Public Goods - General Taxes or User Prices?

This paper compares some of the most common and debated ways of financing the provision of impure public goods/services in a unified dynamic general equilibrium framework. We study and rank a wide variety of ways ranging from provision without any user charges, to provision with full user charges; we also study mixed systems. In our quest for the best system, we address both efficiency and distribution issues. The focus is on the effects of user prices on individual incentives and choices. We identify circumstances under which a market system of user prices not only enhances aggregate efficiency but is also Pareto improving meaning that makes all types of income groups better off. But we also provide examples of circumstances under which user prices on impure public goods do not make sense.