Optimal provision of public intermediate goods with imperfect competition: A note

• Published date: 01 June 2019
• Author: Masatoshi Yoshida,Stephen J. Turnbull
• Date: 01 June 2019
• DOI: http://doi.org/10.1111/ijet.12165

Optimal provision of public intermediate goods with

imperfect competition: A note

Masatoshi Yoshida



and Stephen J. Turnbull

y

In a model where a public intermediate good and differentiated private intermediate goods

produce a final good, this paper explores multiplier effects on aggregate output of the private

goods of the public good, and the optimal level of government spending on it. When it provides a

Hicks-neutral enhancement of productivities of private inputs, its second-best level is identical

to its first-best level because the multiplier effect is independent of its level. However, when the

public good is non-neutral, the second-best supply level is lower (higher) than the first-best when

it is purely goods-saving (labor-saving).

Key words public intermediate good, imperfect competition, Hicks neutrality, multiplier

effect

JEL classification D41, E62, H41

Accepted 2 November 2017

1 Introduction

Many studies, including Heijdra and van der Ploeg (1996), Heijdra and Ligthart (1997), Heijdra et al.

(1998), Molona and Zhang (2001), and Lockwood (2003), have recently explored the optimal

provision of public goods in general equilibrium models of imperfect competition, where a rise in

government spending on public consumption goods gives rise to an increase in national income.

Public consumption goods, such as public order and justice, directly provide utility benefits to every

consumer.

1

On the other hand, Chen et al. (2005) studied the income multiplier effects of a rise in

government spending on productive public goods which influence production of differentiated final



Faculty of Economics, Ryukoku University, Kyoto, Japan.

y

Faculty of Engineering, Information and Systems, University of Tsukuba, Tsukuba, Ibaraki, Japan. Email: turnbull@sk.

tsukuba.ac.jp

An early version of this paper was presented in seminars held at Doshisha University, Gunma University, Kobe University,

Kyushu University, Hokkaido University, Nagasaki University, Nagoya University, Osaka University, Shanghai University

of Finance, University of Tsukuba, and at the Annual Meeting of the Japanese Economic Association in Japan,

October 2011. We would like to thank the participants in these events for constructive comments. Useful comments and

helpful suggestions from the anonymous referee and an editor of this journal greatly improved the paper.The first author

acknowledges financial support from the Ministry of Education, Culture, Sports, Science and Technology of Japan under

Grants-in-Aid for Scientific Research C (No. 21530207). The paper is dedicated to the late Hiroshi Atsumi (Professor

Emeritus, University of Tsukuba) who died on April 15, 2016. We would like to take this opportunity to express our deep

gratitude for Professor Atsumi’s kind and helpful instruction.

1

Yoshida and Kenmochi (2011) investigated the problem of optimalprovision of two kinds of public services in a two-sector

model of monopolistic competition. Public services were classified into two kinds: the first kind, typified by health care, has

only the role of substituting for market services, while the second, typified by elderly care, has the role of contributing to

home production of services as well as substituting for market services.

doi: 10.1111/ijet.12165

International Journal of Economic Theory xxx (2018) 1–14 ©IAET 1

International Journal of Economic Theory

International Journal of Economic Theory 15 (2019) 209–222 © IAET 209