Differentiated Public Goods: Privatization and Optimality

Many commentators criticize centralized government production of public goods for not providing sufficient variety. Citizens with widely varying tastes all consume the same type and level of services. With fixed costs of production and variations in tastes and incomes, an efficient solution, familiar in the public finance literature, can be generated by a single government producer that supplies the public good and charges citizens different tax prices to take account of the variations in their tastes and incomes.1 This solution, while efficient, is not feasible. Citizens have, in general, no incentive to reveal their willingness to pay, and recent advances in demand-revealing processes have not produced entirely satisfactory solutions.2 In addition, if citizens’ tastes diverge sharply enough and if production costs are low enough, efficient solutions may also exist with several suppliers each producing a different variety of output for a subset of citizens.3,4