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In public choice theory, preference revelation (also preference revelation problem) is an area of study concerned with ascertaining the public's demand for public goods. If government planners do not have "full knowledge of individual preference functions", then it's likely that public goods will be under or over supplied.
Unlike private goods, public goods are non-excludable and non-rivalrous. This means that it's possible for people to benefit from a public good without having to help contribute to its production. Given that information about marginal benefits is available only from the individuals themselves, people have an incentive to under report their valuation for public goods. If public finance was entirely voluntary, then anybody who under reported their benefit would decrease their tax payment.
This problem, which is known as the free-rider problem, could potentially result in collective goods being undersupplied.[page needed] In order to try and prevent this from happening, governments resort to compulsory taxation. However, forcing people to pay taxes does not reveal what they would be willing to pay for public goods. Therefore it's likely that the government will either provide too much or not enough of any given public good.
One solution to the preference revelation problem would be to implement tax choice. If taxpayers had to pay taxes anyway, but could choose where their taxes go, then they would have no incentive to hide their true preferences for public goods.
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- The Free-Rider Problem: A Survey
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- Kennett, Patricia (2008). Governance, globalization and public policy. Edward Elgar Publishing. p. 28. ISBN 978-1845424367
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- Hamowy, Ronald, ed. (2008). The Encyclopedia of Libertarianism. Thousand Oaks, CA: SAGE Publications, Cato Institute. ISBN 978-1-4129-6580-4. LCCN 2008009151. OCLC 750831024.