1 Tax-Price Competition for Internationalized Public Goods #

According to globalization, certain kinds of public goods, which used to be working as the goods just in a national economy, are getting internationalized or released for foreigners as well. In addition, those goods often exhibit differentiated features for a certain degree. The goods as such are therefore quite different by nature from the international collective or public goods in the literature. We explore the financing scheme for such kind of internationalized public goods, by a simple model of two countries competing each other with taxing and pricing. Our main results are; 1) The more populated the foreign country, the better off the home country if the degree of product differentiation is sufficiently high, or the foreign is sufficiently populated. Otherwise it may not; 2) While it is distorted by the governmental incentives to utilize foreigners as financial resources, the welfare in a Nash equilibrium is always better than that gained by autarky for any relative size of population and for any degree of differentiation; 3) While, in standard theory of game or oligopoly, more limited strategies for players tend to provide better off in equilibrium as a paradoxical consequence, discriminatory-pricing equilibrium here is better off for sufficiently larger country rather than more limited, uniform pricing scheme. # Very preliminary version. ∗ Graduate School of Environmental Studies, Nagoya University, 464-8601, Japan. E-mail: tkuroda@cc.nagoya-u.ac. jp 2 1.Introduction It is a salient fact in the last decades that globalization has been proceeding with prodigious speed due to the end of the Cold War, technological progress of transportation, and a Copernican revolution in information technology such as internet. Not only information, but also commodities, humankind, or money move vastly among countries, wherein international boundaries as obstacle would be relatively ineffective these days. As interdependent relationship among countries thickens, the role of internationally collective or public goods becomes really important. The global environment and military alliance for security are often cited as good examples. Indeed, international institutions work much more than before such that EU coordinates the interests of most European countries to pursue prosperity of Europe as a whole. They are integrating primal functions of nations, even money, into common property, that is the international public goods for them. In the literature, there is a great stream of researches on international collective or public goods. The assumption on purity with the goods is undoubtedly useful there as for providing a polar case that illuminates the intrinsic characteristics of the goods by simplification. With pure public goods, voluntary contribution by nation-states such as for NATO has been explored as an application of the theory on private provision of public goods. The most celebrating result as such is presented by Warr (1983), which proves the neutrality of income distribution among countries in Nash equilibrium provision of public goods. Except for some international organizations such as UN or the global environment, however, most international public goods in reality are localized more or less due to geography or ownership/control of the goods. Typical examples are international ports/airports and nonmilitary satellites for communications or weather forecasts. According to globalization, moreover, certain kinds of public goods, which used to be working as the goods just in a national economy, are getting internationalized or released for foreigners as well. Recently, high-tech medical cares are becoming more and more to a kind of international public goods since patients of serious disease often fly to foreign hospitals those are developed for specific purposes subsidized much by the national governments. World Heritage Activity organized by UNESCO is another example, whereby more than 700 valuable sites are spread around so many countries. Most of them need huge amount of fixed costs rather than marginal ones, which implies necessity of public provision domestically. That is, for some degree, one might say that nonrivalry characteristic works significantly in such goods once provided. Even with some capacity 3 constraint or geographical limitation, therefore, the nation-state could afford to allow foreigners to access her goods. In addition, one could observe that those goods often have differentiated features for a certain degree. That is, the goods provided by different countries are not perfect substitutes, by which households in any country might enjoy variety of them. Apparently, there exists some differentiation in examples such as medical care with some specialty or World Heritages. Likewise, airport services are differentiated in the departure time of flights, while artificial satellites are in their orbits. The goods as such are therefore quite different by nature from the collective goods in the international setting, which are often used interchangeably as international public goods in the literature. Accordingly, let us call the former as internationalized public goods in the present paper. On the other hand, due to excludable characteristics of such goods, the provider, the national government may charge some fee or specific tax for the access by domestic consumers as well as foreign consumers, in addition to income-tax revenues those should cover the costs mostly if it would be the case of perfectly domestic public goods. In fact, those facilities mentioned above are financed mainly by each national government or some public organization, yet are often open for foreigners as well with certain amount of user fee in most cases. In this case, each national government has a principal responsibility including financial supports, while foreign citizens as well as the own nation often enjoy it by traveling there and paying some exhibition charges or taxes for staying at hotels around there. Unlike the argument by Tiebout (1956) on local public goods in regional setting, however, it may not be plausible to assume free migration between countries. Hence, our purpose here is not for attempting to establish some optimality characteristics with localization in public goods, yet for highlighting some degree of localization of public goods in international setting to reflect the reality, which seem becoming important more and more recently. Rather, we focus here on the interdependent behavior of nation states those are conjunct in the financial strategies for providing the public goods. That is, in the case we analyze here, there is a possibility to gain the budget by revenues of user/access fee, and thus the strategy of each 1 Many of international organizations also exhibit excludability, although they are often sited as examples of international “public goods. ” 2 An extreme example is so-called “NHS tourism” in UK, where even illegal immigrants could have free medical treatments through NHS. It attracts many foreigners from countries with expensive services. 4 government is maximizing welfare of her own citizens by choosing optimal combination of income tax and price of charge. To put it differently, it is an extension of the optimal taxation theory to incorporate the international setting wherein the countries could depend on each other for achieving the optimal taxation. Unlike the conventional model of fiscal competition where each government has only a single instrument such as capital tax (see, Wildasin (1991) among others), each government has two choice variables in our model, namely income-tax rate and price of charge. For the sake of simplicity, therefore, the quantity of goods provided is given exogenously as a fixed cost and the marginal costs for the provision are assumed out in the subsequent analysis. While the outcome of discriminatory pricing seems obvious here and thus will be discussed later, it is assumed instead that each government should set a uniform price for all beneficiaries or users in the main part of this paper. In other words, the price of charge is assumed the same for foreigners as its own citizens. On the other hand, the present model differs from the bilateral oligopoly theory of international trade in two folds. First, the income tax on own citizens is available here as a tool for budgeting the provision of goods, which is substitutable to user charge. Second, as mentioned above, the price of charge is uniform for all users in the main body of the analysis. An important aspect here is to examine the effect of relative size in population on Nash equilibrium. In the case of pure international public goods, some results are obtained as socalled disproportionate burden sharing or exploitation of the great by small, firstly by Olson and Zeckhauser (1966), followed by Sandler (1992) or Boadway and Hayashi (1999), among others. Especially, Boadway and Hayashi (1999) consider the effect of population explicitly and show that, among contributing countries, citizens in a larger country are worse off than those in a smaller country, in the Nash equilibrium of the voluntary contribution game between countries. Since international migration is much less than regional, it is a distinguished perspective of international issues on public goods. While our analysis is focusing the strategy of tax-price combination rather than the quantity of contribution for public goods, one might also expect that more population in the other country should be always better for us because more people would access/visit our public goods with the payment of access charges, which helps our national finance consequently. It is not necessarily true, however, according to our main results as follows. 1) The more populated the foreign country, the better off the home country if the degree of product differentiation is sufficiently high, or the foreign is sufficiently populated. Otherwise, 5 yet, it may not. 2) Al