Public Good Producers and Spillovers : An Analysis of Duopoly Behavior

Abstract

This article presents an analysis of the output and welfare effects of different patterns of behavior when two public good-producing communities interact through benefit spillovers. This analysis differsfrom earlier work in ascribing to these communities (1) more complex assumptions concerning the behavior of neighboring communities and (2) a longer time horizon in the welfare- maximizing decision. We develop two models of independent community behavior and, as a benchmark, a model of the behavior of a consolidated jurisdiction which internalizes the benefit spillovers. Simulations using these models suggest that (1) the importance of welfare losses resulting from strategic behavior relative to those resultingfrom uninternalized spillovers vary directly with the extent of spillovers, indirectly with intercommunity differences; (2) more sophisticated behavior results in short-term welfare gains but losses in equilibrium; and, (3) it is efficient for communities with greater resources or greater degrees of spillover to bear a disproportionate burden of public good provision, and welfare is better redistributed through resource transfers than through a reallocation of public good provision.