Why Praise Inequality? Public Good Provision, IncomeDistribution and Social Welfare

We consider a two-person Cournot game of voluntary contributions to a public good with identicalindividual preferences, and examine equilibrium aggregate welfare under a separable, symmetric andconcave social welfare function. Assuming the public good is pure, Itaya, de Meza and Myles (Econ.Letters, 57: 289-296; 1997) have shown that maximization of social welfare precludes incomeequality in this setting. We show that their case breaks down when the public good is impure: thereexist individual preferences under which maximization of social welfare necessitates exact incomeequalization. Even if the public good is pure, any given, positive level of income inequality can beshown to be socially excessive by suitably specifying individual preferences. Thus, sans knowledgeof individual preferences, one cannot reject the claim that a marginal redistribution from the rich tothe poor will improve social welfare, regardless of how small inequality is in the status quo...