Lindahl equilibrium
The Lindahl equilibrium describes a situation in which individuals pay for the provision of a public good according to their marginal willingness to pay. The Lindahl price is the resulting amount an agent pays for his or her share of the public goods.
It was named after Erik Lindahl, who proposed this method for financing public goods.
The Lindahl equilibrium is Pareto efficient and it can be shown that an equilibrium exists for diverse environments. However, it requires knowledge of the demand functions for each individual for all private and public goods. Those individuals can get a free ride if they lie about their preferences and understate their interest in public goods. Therefore, the Lindahl is not incentive compatible – it amounts to a Prisoner's dilemma. Preference revelation mechanisms can be used to address that problem.
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