Lindahl Tax - Lindahl Equilibrium

Lindahl Equilibrium

A Lindahl equilibrium is a method for finding the optimum level for the supply of public goods or services.This idea was given by Erik Lindahl in 1919. The Lindahl equilibrium happens when the total per-unit price paid by each individual equals the total per unit cost of the public good. The Lindahl equilibrium is Pareto efficient and it can be proved that an equilibrium exists for different environments.

Lindahl equilibrium describes how efficiency can be sustained in an economy with personalised prices. Johansen (1963) gave the complete interpretation of the concept of "Lindahl Equilibrium." The basic assumption of this concept is that every household's consumption decision is based on the share of the cost they must provide for the supply of the particular public good.

The importance of Lindahl Equilibrium is that it fulfills the Samuelson rule and is therefore said to be pareto efficient, despite the existence of public goods. It also demonstrates how efficiency can be reached in an economy with public goods by the use of personalised prices. The personalised prices equate the individual valuation for a public good to the cost of the public good.