Public Finance
In his doctoral dissertation of 1919, Die Gerechtigkeit der Besteuerung, and in a subsequent paper (1928), Lindahl elaborated on Wicksell’s approach to public finance (Wicksell 1896) and proposed an individualized tax, now known as a “Lindahl tax”, for financing the provision of public goods and services in accordance with individual benefits.
This tax is determined from so-called “Lindahl prices”, which are calculated for each individual consumer (or group of consumers) and set according to the consumer’s marginal benefit, evaluated at the equilibrium quantity. According to Lindahl, these prices can be viewed in the same way as implicit prices for joint products, which in equilibrium reflect differences in the relative demand for jointly produced commodities. Analogously, different individuals (or groups of homogenous individuals) who jointly consume a public good have different demand prices or willingness to pay for a marginal unit of government expenditure. In “Lindahl equilibrium” the total quantity of the public good satisfies the requirement that the aggregate marginal benefit equals the marginal cost of providing the good (Bohm 1987).Lindahl’s path-breaking contribution was properly appreciated only in the 1950s, when the main part of his dissertation appeared in an English translation (Lindahl 1958) and Paul A. Samuelson, Richard A. Musgrave and others harked back to it in their own contributions to the modern theory of public finance. In the 1970s Lindahl’s approach, which originally had been formulated in a partial equilibrium setting, was reformulated in a general equilibrium framework (Foley 1970). Despite its great theoretical appeal, practical use of the benefit approach is considerably restricted by the information problems that arise from determining the individual marginal benefits, because taxpayers have no incentives to reveal their preferences for public goods.