Using a general-equilibrium model with endogenous factor supplies, this article investigates the provision of factor-augmenting public inputs. Such inputs are intermediate goods that affect production functions in a collective manner and give rise to increasing returns. Unlike with collective consumption goods, deviation from the first-best condition for a public input is inappropriate if taxes are set optimally. When taxes are not optimal, a second-best rule must include a feedback effect on revenue as well as the deadweight cost of taxes. Implications for benefit-cost analysis and for interpretation of estimates of the social returns to public capital are explored. Copyright 2002, Oxford University Press.
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Article provided by Oxford University Press in its journal Economic Inquiry.
Volume (Year): 40 (2002) Issue (Month): 1 (January) Pages: 60-68 Download reference. The following formats are available: HTML
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Handle: RePEc:oup:ecinqu:v:40:y:2002:i:1:p:60-68
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Diego Martinez Lopez & A. Jesus Sanchez Fuentes, 2006.
"On the optimal level of public inputs,"
Working Papers
06.34, Universidad Pablo de Olavide, Department of Economics, revised Mar 2008.
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