Valuation of public goods: an intertemporal mixed demand approach

This paper presents a new mixed demand model for measuring the value of public goods in an intertemporal optimization framework. From the specification of an indirect utility function allowing for public goods, direct demand functions for private goods are derived and estimated jointly with the Euler equation for intertemporal consumption behavior, using US data. This allows us to identify the marginal utility of private consumption and to obtain the inverse demand or shadow price of a public good, which is then related to its observed price to assess whether the public good is efficiently provided. There is evidence, though suggestive, that the public good as measured by national defense in the USA has been inefficiently provided over the past decades.