Subscription Equilibrium with Production: Neutrality and Constrained Suboptimality of Equilibria*

We revisit the analysis of subscription equilibria in a full fledged general equilibrium model with public goods. We study the case of a non-profit, or public, firm that produces the public good using private goods as inputs, which are to be financed by voluntary contributions of households. We analyze policy interventions that will lead to an increase of the public good level at subscription equilibria, and show that most of the standard neutrality results do not survive in our general equilibrium model with many private goods and relative price effects allowed. We also take a direct approach to welfare analysis and study interventions that has the goal of Pareto improving upon subscription equilibrium outcomes. We delineate conditions under which, for a generic set of economies, well chosen interventions will Pareto improve upon a given subscription equilibrium outcome. In particular, we show that a general non-neutrality result in terms of utilities holds even if all households are contributors. ∗We would like to thank Steve Matthews for very helpful comments. Unal Zenginobuz acknowledges partial support from Bogazici University Research Fund, Project No: 05C101. †Department of Mathematics for Decision Theory (Di.Ma.D.), University of Florence, via Lombroso 6/17, 50134 Firenze, Italy; e-mail: antonio.villanacci@unifi.it. ‡Department of Economics and Center for Economic Design, Bogazici University, 34342 Bebek, Istanbul, Turkey; e-mail: zenginob@boun.edu.tr.