A Bargaining Model of the Pure Theory of Public Expenditure

Abstract

This paper introduces a geometric analysis of public goods very similar to that of bilateral monopoly, demonstrating the essential identity of the two theories. Various public-finance theories are then illustrated: Their basic but often vaguely outlined ideas are elucidated, and implicit assumptions are unveiled in order to show that their different implicit behavioral assumptions are largely responsible for their disagreements. It is found that, under the usual behavioral assumptions, a unique optimum solution cannot be attained spontaneously, but a unique set of possible solutions can be delimited. The importance of income-redistribution effects, hitherto neglected by theorists examining the bargaining solution for an optimum budget, is also demonstrated.