This chapter presents further preliminaries, including methodological considerations, the normative underpinning, equilibrium concepts, and important definitions (e.g., Nash equilibrium, free riding, spillovers). At the outset it is important to present a clear interpretation of the notions of optimality used throughout this book. Additionally, Nash equilibrium figures in an important way in much of the analysis and needs to be introduced at an early stage. A much used graphic device for depicting Nash equilibrium is displayed so that the reader can gain an appreciation of the simplicity and usefulness of the diagrammatic device introduced in Chapter 6 and used in Part III. We also refer to other devices that are more cumbersome than our diagrammatic procedure. Since many of the concepts and definitions reviewed here are dealt with extensively elsewhere in the book, the analysis is understandably brief.

This chapter is divided into six main sections. Methodological considerations are presented in Section 2.1. The normative underpinnings of this study follow in Section 2.2, where Pare to optimality and related concepts are defined. Section 2.3 contains an analysis of equilibrium concepts such as Nash, subgame perfection, and Lindahl equilibria. Fiscal equivalence, spillovers, and local public goods are defined in Section 2.4. Section 2.5 concerns clubs and club goods, and Section 2.6 puts forward a brief discussion of policy failures.

Methodological considerations

This book is designed to serve the needs of both students and researchers with an interest in a modern treatment of market failures.