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Department of Economics, Umeň University Umeň Economic Studies, Department of Economics, Umeň University

No 944:
Habit Formation and the Pareto-Efficient Provision of Public Goods

Thomas Aronsson () and Ronnie Sch÷b ()

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; (follow links to similar papers)

JEL-Codes: D60; H21; H41; (follow links to similar papers)

20 pages, January 16, 2017

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