Externalities and Public Goods in a Federal Framework : Shibata & Warr Neutrality Theorems

The paper is intended to provide a theoretical contribution to the analysis of central government's normative economic policies in a framework where regional provision of goods with negative spillovers, and public goods used to reduce related externalities, are considered. Firstly the range of validity of the two neutrality theorems is examined, and it is shown that the first one (the Warr theorem) does not always hold true, while Shibata's second neutrality theorem (i.e. that Nash equilibrium quantity of a negative public good is independent of the aggregate wealth) holds true only in specific cases. Secondly, the model is extended to consider regional production of goods causing different negative spillovers (pollution) into the other Regions, and regional provision of public goods to reduce pollution with different effectiveness in the other Regions. As far as Central Government income redistribution policies are concerned, it is shown that neutrality theorems are in general not effective, insofar as the validity is restricted only to polar cases. In general, when spillovers are different in the different Regions, Central Government redistribution policy is Pareto improving when foreign abatement productivity is higher than the domestic one in the income receiving Region, and vice versa in the income contributing Region