The Lindahl equilibrium is a method proposed by Erik Lindahl for financing public goods. Erik R. Lindahl (1891-1960) was an Swedish economist. ... In economics, a public good is a good that is hard or even impossible to produce for private profit, because the market fails to account for its large beneficial externalities. ...

In the Lindahl equilibrium, individuals pay for the provision of a public good according to their marginal willingness to pay. The Lindahl price is the resulting tax a citizen pays for his or her share of the public goods.

The method is Pareto efficient and it can be shown that an equilibrium exists for diverses environments. However, it requires knowledge of the the demand functions for each individual for all private and public goods. Those individuals can get a free ride if they lie about their preferences and understate their interest in public goods. Therefore, the Lindahl is not incentive compatible – it amounts to a Prisoner's dilemma. Preference revelation mechanisms can be used to address that problem. Pareto efficiency, or Pareto optimality, is a central theory in economics with broad applications in game theory, engineering and the social sciences. ... In economics and political science, free riders are actors who consume more than their fair share of a resource, or shoulder less than a fair share of the costs of its production. ... Will the two prisoners cooperate to minimize total loss of liberty or will one of them, trusting the other to cooperate, betray him so as to go free? Many points in this article may be difficult to understand without a background in the elementary concepts of game theory. ...