Public Goods and Budget Deficit

We examine incentive-compatible mechanisms for fair financing and efficient selection of a public budget (or public good). A mechanism selects the level of the public budget and imposes taxes on individuals. Individuals’ preferences are quasilinear. Fairness is expressed as weak monotonicity (called scale monotonicity) of the tax imposed on an individual as a function of his benefit from an increased level of the public budget. Efficiency is expressed as selection of a Paretooptimal level of the public budget. The budget deficit is the difference between the public budget and the total amount of taxes collected from the individuals. We show that any efficient scale-monotonic and incentive-compatible mechanism may generate a budget deficit. Moreover, it is impossible ∗Institute of Mathematics and Center for the Study of Rationality, The Hebrew University of Jerusalem, Givat Ram, Jerusalem 91904, Israel (e-mail: [email protected]). †Department of Economics, National Defense University Fort McNair, Washington, DC 20319-5062 (e-mail: [email protected]).