The effects of risk and ambiguity on the efficient and equilibrium provision of a public good
Pestrak, James Walter
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This thesis addresses the effects of risk and ambiguity on the efficient and equilibrium quantities of a public good when the state of nature is unknown. I show that if society faces risk, then the efficient quantity of the public good decreases as risk about its effective supply increases when the probability of the high payoff state of nature is sufficiently small. A second result is that in an economy of ambiguity averse consumers, an increase in ambiguity implies that more of the public good must be provided to maintain efficiency. The final result concerns the difference between the efficient and equilibrium levels of the public good. The effect of increased risk on this difference is dependent upon the prudence of consumers, whereas an increase in the consumer population increases the difference.