Lindahl Equilibrium

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DEFINITION of 'Lindahl Equilibrium'

A concept that proposes that individuals pay for the provision of a public good according to their marginal benefits in order to determine the efficient level of provision for public goods. In the equilibrium state, all individuals consume the same quantity of public goods but may face different prices because some people may value a particular good more than others. The Lindahl equilibrium price is the resulting amount paid by an individual for his or her share of the public goods.

BREAKING DOWN 'Lindahl Equilibrium'

The Lindahl equilibrium concept was proposed by Swedish economist Erik Lindahl. Lindahl prices can be viewed as individual shares of the collective tax burden of an economy, and the sum of Lindahl prices equals the cost of supplying public goods such as national defense. One key limitation of the Lindahl equilibrium is that we do not know how much each person values a certain good, which limits its application in the real world.

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