The State Finance and Public Goods from The General Equilibrium Viewpoint: Fundamental Welfare Theorems for Lindahlian General Equilibrium with Money

This paper deals with the concept of Lindahl general equilibrium with money and its relation to the first and second fundamental theorems of welfare economics and other problems like core arguments. This paper is concerned with the question of how the optimal supply of public goods can be achieved in an ideal situation based on market transactions. The paper also points out that unless the (Lindahlian) financing problem is treated together with the fiscal problem of the state (as a monetary equilibrium), the fundamental theorems of economics may lead to the wrong message in terms of policy. The ideal state described in this paper is one in which public and private firms and their profits are clearly distinguished, and in which the optimal allocation is feasible only under a constant government deficit. This is not addressed in the traditional Lindahl general equilibrium and cost-sharing equilibrium. Also, under such a general situation, the activity criterion for public firms in the ideal state is organized as a special type of marginal cost pricing. The framework of this paper, including government activities (optimal money issuance and taxation), is of extremely urgent significance, especially as seen in the recent problems of health care costs and state finances.