A simple market-like allocation mechanism for public goods

Abstract

We argue that since allocation mechanisms will not always be in equilibrium, their out-of-equilibrium properties must be taken into account along with their properties in equilibrium. For economies with public goods, we define a simple market-like mechanism in which the strong Nash equilibria yield the Lindahl allocations and prices. The mechanism satisfies critical out-of-equilibrium desiderata that previously-introduced mechanisms fail to satisfy, and always (weakly) yields Pareto improvements, whether in equilibrium or not. The mechanism requires participants to communicate prices and quantities, and turns these into outcomes according to a natural and intuitive outcome function. Our approach first exploits the equivalence, when there are only two participants, between the private-good and public-good allocation problems to obtain a two-person public-good mechanism, and then we generalize the public-good mechanism to an arbitrary number of participants. The results and the intuition behind them are illustrated in the familiar Edgeworth Box and Kölm Triangle diagrams.