Issues
Lindahl prices do face some serious drawbacks. First, individual demand curves, and thus individual preferences, are not easily known. Due to the free-rider problem, people have the incentive to hide their true preferences and thus their marginal valuation (However, mechanism design of Groves, which is strongly individually incentive compatible, and Vickrey auctions could be used to overcome this problem).
A second drawback to Lindahl prices is that they may be unfair. Consider a television broadcast antenna that is arbitrarily placed in an area. Those living near the antenna will receive a clear signal while those living farther away will receive a less clear signal. Those living close to the antenna will have a relatively low marginal value for additional wattage (thus paying a lower Lindahl price) compared to those living farther away (thus paying a higher Lindahl price).
Some points still remain unanswered, these form the main issues of Lindahl taxation:
- How much should the government charge(or tax) each individual to cover the cost of supply of the public good?
- In Lindahl pricing everyone is taxed according to the benefit they derive from the public good, this information is difficult to collect, and people also have the incentive to under report.
Read more about this topic: Lindahl Tax
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