Public Policy and the Private Provision of Public Goods under Heterogeneous Preferences

We compare the relative efficiency of second-best policies designed to promote the private provision of public goods. We use the provision of local public goods as our central example and discuss settings in which the model extends to choices over energy-consuming durables. We introduce preference heterogeneity by allowing a subset of agents to value the public good more than others, reflecting a form of prosocial preference. We further assume that agents face convex costs of provision, an assumption that accords well with individually provided public goods such as neighborhood amenities. We show that minimum standards are often more efficient than uniform price-based incentives in this setting. Extending our model to allow for both benefit and cost heterogeneity, we show how policy choice depends on the strength and correlation between the two forms of heterogeneity.