Public goods, growth, and welfare (Q1123797)

There are n identical individuals, each with an exogenous labour endowment, which may be used to produce a private and a public good, both at constant unit costs. The focus is on symmetric Nash equilibria. Nash behaviour implies that the public good is typically underprovided if compared with a Pareto efficient allocation. The question then is whether growth is necessarily welfare-improving. The answer is yes in the following two scenarios: (i) Both goods are normal and growth is in the form of increased factor endowment; (ii) both goods are normal and growth means a reduction in the unit cost of the public good. The effect is however ambigous if growth leads to a reduction in the unit cost of the private good. ``By examining the possibility of immiserizing growth in the face of a distortion, our study is in the tradition of a well-known trade literature whose contributors include Bhagwati (1958), Johnson (1967), Eaton and Panagariya (1982)'' (quoted from the introduction).