Optimal Cost Sharing for Green Goods

Abstract

Impure public goods, which jointly produce private and public benefits, are widely available and increasingly prevalent, especially in the realm of environmentally friendly and socially responsible consumption. Existing research on impure public goods focuses on individual consumer choice and resultant Nash equilibrium outcomes, but little has been done to analyze how policy can improve efficiency in such markets. We develop the first mechanism to implement a Pareto optimal allocation in impure public good markets. We prove existence of a revenue-neutral cost-sharing solution and examine the properties of this equilibrium, demonstrating how it can be implemented through equivalent price adjustments to goods or embodied characteristics. Our approach employs standard Pigovian principles but applies to a much wider class of problems, including settings with strategic interactions, heterogeneous consumers, and richer preference structures. This analysis has many applications, including charitable giving with warm glow, renewable energy, and international efforts to generate public goods.