Building on previous work on monopolistic competition in variety space, this paper demonstrates that the privatization of public good production will not produce optimal results even when citizens have widely varying tastes for public services. While the use of multiple providers may indeed be optimal, equilibrium in an unregulated competitive market may be inferior to the public production of a single variety. The full benefits of having multiple providers can only be obtained by regulating both entry and production levels. A free market financed by tax-deductible contributions will have too many producers supplying too much output.

* Stern School of Business, New York, NY 10012, tel. (212) 998-0864, fax (212) 995-4218, e-mail: neconomi@stern.nyu.edu, www: http://raven.stern.nyu.edu/networks/

Chapter 6 in Does Economic Space Matter?, H. Ohta and J.-F. Thisse (eds.), St. Martin's Press, London: 1993.

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