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The dual nature of public goods and congestion: the role of fiscal policy revisited

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  • Santanu Chatterjee
  • Sugata Ghosh

Abstract

The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption-based instruments in conjunction with the income tax. An income tax-financed increase in government spending dominates both lump-sum and consumption tax-financing. Replacing the lump-sum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 44 (2011)
Issue (Month): 4 (November)
Pages: 1471-1496

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Handle: RePEc:cje:issued:v:44:y:2011:i:4:p:1471-1496

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Cited by:
  1. Chatterjee, Santanu & Turnovsky, Stephen J., 2012. "Infrastructure and inequality," European Economic Review, Elsevier, Elsevier, vol. 56(8), pages 1730-1745.

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