Equity and Sharing the Cost of a Public Project *
Equity and Sharing the Cost of a Public Project *
This chapter explores the cost sharing implications of a number of alternative theories of justice. It looks at a two-person economy in which the individuals have quasi-linear utility functions and in which information about preferences is private information. In this framework, if the cost for a single unit of a public good is to be shared, then any strategy-proof cost sharing mechanism will not involve the use of the individuals' preferences. If the planner can observe the individuals initial holding of private goods, then cost sharing will depend on the individuals' ability-to-pay as measured by their initial endowment. In general, alternative theories of justice imply that the richer of the two individuals should pay more. Egalitarian theories further imply that the rich individual's share should increase with the difference in the individuals' initial wealth. Since in contrast to the classical derivation of the ability-to-pay principle, declining marginal utility of income plays no role, our results may be viewed as providing a distinct additional justification for both the ability-to-pay approach and for progressive taxation using norms based on theories of equity and justice. The chapter's two-person model gives rise to diagrams and simple closed form solutions for the exposition of the results in the chapter.
Keywords: justice, equity, ability-to-pay, cost sharing, two-person economy, quasi-linear utility function
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