Price subsidies versus public provision

The paper investigates whether price subsidization or public provision of a private good, x, is the more efficient redistributional instrument in addi tion to an optimal nonlinear income tax. The identity of high and low skill individuals is assumed to be private information generating a self-selecti on constraint. If the high skill person's consumption of x is sufficiently large relative to that of the low skill person, public provision is the bet ter scheme. With the opposite situation the price subsidy may be the prefer red instrument. The paper also characterizes the mixed scheme where all the instruments are used optimally. The mixed scheme can be degenerate with on ly public provision being used in addition to the income tax. At an optimum where both instruments are used, good x is subsidized, the low skill perso n is supplementing and the high skill person is forced to overconsume.