Subscription equilibrium with production: non-neutrality and constrained suboptimality

We study a general equilibrium model with a non-profit firm producing a public good using private goods as inputs which are financed by voluntary contributions (subscriptions) of households. We analyze policy interventions that increase the public good level at subscription equilibria, and show that some of the standard results of the neutrality literature do not survive in our model with many private goods and relative price effects allowed. First, we show that a redistribution away from a contributor or even a decrease in the total wealth of all contributors (while the contributing set of agents remains intact) can lead to an increase in the provided level of public good. Moreover, we prove that increasing the production of public good is neither a sufficient nor a necessary condition to increase all households’ welfare. Finally, we present conditions under which, for a generic set of economies, well chosen interventions will Pareto improve upon a given subscription equilibrium outcome. As a consequence, a general non-neutrality result in terms of utilities holds even if all households are contributors.