Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
Lindahl Model:
The benefit principal was more accurately put forwarded by 
Erik Lindahl. He has constructed a pure theoretical model of a 
partial equilibrium analysis under the assumption of voluntary 
exchange principle of a competitive market to solve the problem of 
equity in taxation. According to him, the problem of equity should 
be confined to the following aspects of public finance, namely: 
(i) 
the determination of total amount of public expenditure 
(ii) 
the allocation of total public expenditure among different 
public services 
(iii) 
the allocation of taxes among different individuals in 
relation to their subjective evaluation of benefit by them 
from the public services. 
Lindahl tries to apply the principle of voluntary exchange in 
the satisfaction of social wants, similar to the pricing process in the 
market or private goods in satisfying the private wants. 

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Assumptions: 
(i) 
The state has a democratic set-up. 
(ii) 
The state provides only one social good. 
(iii) 
There are two tax payers, A and B who will be benefit 
from provision of the social goods. 
(iv) 
There is equal distribution of income between these two 
individuals A and B. 
(v) 
The production function of the social good is linear and 
homogeneous so that there is condition of constant 
costs. 
With the help of these assumptions Lindahl simultaneous 
determine sharing of tax and the extent of provision of social good 
to these individuals. 
 
 
 
 
Figure 15.1: Lindahl‟s ModeL 
 
In the above figure, the volume of social goods provided by 
the state measured along the horizontal axis. The left side vertical 
axis measures the percentage of total cost A is willing to share and 
the right side vertical axis measures that of B. The curve aa is A‘s 
demand curve for social goods and the curve bb is B‘s demand 
curve for social goods. These demand curves are drawn on the 
usual assumption of diminishing marginal utility. That is to say, an 
individual demands more of social goods only when he has to pay 
less price (i.e. tax).
Now suppose that initially OL units of social goods are 
provided by the state. To settle the costs of social goods thus,