The Role of Prices for Excludable Public Goods

When a public good is excludable it is possible to charge individuals for using the good. We study the role of prices for publicly provided excludable public goods within an extension of the Stern-Stiglitz version of the Mirrlees optimal income tax model.We show that for a public consumer good there is a range of circumstances in which charging a price for the public good decreases welfare. We find that a necessary condition for a positive price to be desirable is that the marginal valuation of the public good is increasing in leisure. However, even under this condition, welfare is initially decreasing in the price, implying that charging a lower than optimal price may be less efficient than setting a zero price. Thus, even when there is a case for charging a price for the public good, an attempt to implement the optimum in practice may be risky, as even setting a modest price to avoid overshooting the optimum may be Pareto inferior to charging no price at all. The policy case for a price may thus appear rather weak. We also find that producers using an intermediate excludable public good as an input should not be charged a price for using the good.