Definition of Lindahl equilibrium
What is a Lindahl balance?
Lindahl’s equilibrium is a state of equilibrium in a quasi-market for a pure public good. Like a competitive market equilibrium, the supply and demand of the good are balanced, in addition to the cost and income to produce the good. Lindahl’s equilibrium depends on the possibility of implementing an effective Lindahl tax, initially proposed by Swedish economist Erik Lindahl.
Key points to remember
- Lindahl’s equilibrium is a theoretical state of an economy where the optimum amount of public goods is produced and the cost of public goods is fairly shared among all.
- Achieving the Lindahl balance requires the establishment of a Lindahl tax, which charges each individual an amount proportional to the benefit he receives.
- Lindahl’s equilibrium is a theoretical construct because various theoretical and practical issues prevent an effective Lindahl tax from actually being implemented.
Understanding a Lindahl Balance
At Lindahl equilibrium, three conditions must be met: each consumer demands the same quantity of public good and thus agrees on the quantity to be produced, consumers each pay a price (called the Lindahl tax) according to the marginal benefit that they receive. , and the total tax revenue covers the full cost of providing the public good. Achieving the Lindahl balance requires the establishment of a Lindahl tax.
A Lindahl tax is a type of taxation proposed by Swedish economist Erik Lindahl in 1919, in which individuals pay for the provision of a public good according to the marginal benefit they receive, in order to determine the level efficient delivery for each public good. In the equilibrium state, all individuals consume the same amount of public goods but will face different prices under the Lindahl tax because some people may value a particular good more than others.
According to this paradigm, the relative share of each individual in total tax revenue is proportional to the level of personal utility from which he enjoys a public good. In other words, the Lindahl tax represents an individual’s share of the collective tax burden of a given economy. The actual amount of tax paid by each individual corresponds to this proportion multiplied by the total cost of the good.
The equilibrium quantity will be the amount that equates the marginal cost of the good with the sum of the marginal benefits to consumers (in monetary terms). The Lindahl price for each individual is the resulting amount paid by an individual for their share of public goods. Lindahl prices can therefore be viewed as individual shares of an economy’s collective tax burden, and the sum of Lindahl prices equals the cost of providing public goods – such as national defense and other common programs and services – that collectively benefit a society.
Problems with the Lindahl tax
Lindahl’s equilibrium has more of a philosophical application than a practical one because of various issues that restrict the real-world function of Lindahl’s equilibrium. Due to the inability to effectively implement a Lindahl tax to achieve the Lindahl balance, other methods such as surveys or majority voting are normally used to decide on the provision and funding of public goods.
In order to implement a Lindahl tax, the tax administration must know the exact shape of each individual consumer’s demand curve for each public good. However, without a good market, consumers have no way of communicating what these demand curves look like. Since it is not possible to assess the extent to which each person values a certain good, the marginal benefit cannot be aggregated for all individuals.
Even if consumers could communicate their preferences and the tax administration could aggregate them, consumers might not even be aware of their own preferences for a given public good, or of their value depending on whether, to what extent or how often. a given consumer actually consumes the public good.
Even though consumer preferences are known, communicated and aggregated, they may not be stable at the individual or aggregate level. Estimates of consumer demand curves may need to be continually updated in order to adjust both the total quantity of each public good produced and the price charged to each individual.
Equity issues of a Lindahl tax have also been raised. The tax imposes on each individual an amount equal to the benefit he derives from the property. For some public goods, such as social safety nets, this obviously doesn’t make sense. For example, this would require imposing a tax on social assistance recipients at least equal to the transfer payments they receive, which would appear to defeat the very purpose of the program.
It may also be that some consumers are receiving negative use from a particular public good and that the good is actually causing them harm. For example, a fervent pacifist who deeply opposes the very existence of an armed army for national defense. A Lindahl tax for that person would necessarily be negative. This would lead to a lower equilibrium quantity (since the total demand is lower) and a higher Lindahl price for all other members of society (since the total required income would include the price of the pacifist’s “buyout”). .
In the extreme, it could even lead to a case where a small minority group or even a single individual with strongly contrary preferences could completely prevent the production of a given public good, regardless of its benefit to the rest of society. , if the price to buy them is higher than the amount others are willing to pay. In this case, it might make more sense to simply ignore the interests of the annoying minority, divide the body politic based on preferences for public goods, or physically eliminate the contrarian minority from the economy.