Comment on W. Güth und M. Hellwig: Competition versus Monopoly in the Supply of Public Goods

Abstract

Güth and Hellwig consider the situation in which a group of producers (each one having access to the same technology) competes for the right to supply a public good. It is assumed that individual exclusion is impossible so one might prefer to speak of a collective good. The problem addressed is whether competition for the market will result in efficient supply. Efficiency is understood to be in the second best sense (maximize consumer surplus subject to a zero profit constraint) as it can be shown that in many cases any mechanism that maximizes consumer surplus imposes an expected loss on the supplier¹⁾. The authors show that competition might lead to efficiency, but that it need not. Specifically, the competition game played by the potential suppliers has multiple Nash equilibria, some of which are efficient and some of which are not. In particular, if there are at least 2 potential suppliers, then there exists an equilibrium resulting in the second best (Proposition 4.1), but independent of the number of potential suppliers, there also exists an equilibrium resulting in the same outcome as the (inefficient) one obtained in the monopoly case. (Proposition 4.2)²⁾.