This equilibrium is also the efficient level of public goods, as the social marginal benefit is equivalent to the social marginal cost. Therefore, the Lindahl pricing centers around the benefit principle, in which individuals are taxed based on their valuation of the benefit received from the good. Second, the cost of the public good is covered by the aggregate taxes. First, individuals are willing to pay the respective taxes for the quantity of public goods provided. This method of taxation for public goods is an equilibrium for two reasons. Leif Johansen gave the complete interpretation of the concept of "Lindahl equilibrium", which assumes that household consumption decisions are based on the share of the cost they must provide for the supply of the particular public good. Therefore, the Lindahl equilibrium describes how efficiency can be sustained in an economy with personalized prices. It can be shown that an equilibrium exists for different environments. If each person's tax price is set equal to the marginal benefits received at the ideal service level, each person is made better off by provision of the public good and may accordingly agree to have that service level provided.Ī Lindahl equilibrium is a state of economic equilibrium under a Lindahl tax as well as a method for finding the optimum level for the supply of public goods or services that happens when the total per-unit price paid by each individual equals the total per-unit cost of the public good. As people are different in nature, their preferences are different, and consensus requires each individual to pay a somewhat different tax for every service, or good that he consumes. Erik Lindahl was deeply influenced by Wicksell, who was his professor and mentor, and proposed a method for financing public goods in order to show that consensus politics is possible. Knut Wicksell was one of the most prominent economists who studied this concept, eventually arguing that no individual should be forced to pay for any activity that does not give them utility. The idea of using aggregate marginal utility in the analysis of public finance was not new in Europe.
Lindahl tax is the optimal quantity times the willingness to pay for one more unit of that good at this quantity. The optimal level of a public good is that quantity at which the willingness to pay for one more unit of the good, taken in totality for all the individuals is equal to the marginal cost of supplying that good. Lindahl taxes can be seen as an individual's share of the collective tax burden of an economy. Lindahl taxation is designed to maximize efficiency for each individual and provide the optimal level of a public good. In other words, they pay according to the amount of satisfaction or utility they derive from the consumption of an additional unit of the public good. A Lindahl tax is a form of taxation conceived by Erik Lindahl in which individuals pay for public goods according to their marginal benefits.
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