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The Myth of Fiscal Externalities

Author

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  • Edgar K. Browning

    (Texas A&M University)

Abstract

Many economists refer to phenomena whereby the behavior of people affects the cost of some subsidy or alters the revenues from some tax as externalities. The author refers to these as “fiscal externalities†; an example is smoking imposing costs on taxpayers due to the existence of subsidized medical care. This article shows that fiscal externalities do not necessarily imply any inefficiency, and when there is inefficiency, it is the result of the preexisting policy (the medical care subsidy) that creates the fiscal externality. Moreover, when there is inefficiency, the nature and magnitude of the fiscal externality is not a reliable guide to the appropriate corrective policy. For example, it will usually be best to modify the preexisting policy (the medical care subsidy) rather than tax smoking.

Suggested Citation

  • Edgar K. Browning, 1999. "The Myth of Fiscal Externalities," Public Finance Review, , vol. 27(1), pages 3-18, January.
    • Handle: RePEc:sae:pubfin:v:27:y:1999:i:1:p:3-18
    DOI: 10.1177/109114219902700101
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    References listed on IDEAS

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    1. Dwight R. Lee, 1991. "Environmental Economics And The Social Cost Of Smoking," Contemporary Economic Policy, Western Economic Association International, vol. 9(1), pages 83-92, January.
    2. Tresch, Richard W., 2014. "Public Finance," Elsevier Monographs, Elsevier, edition 3, number 9780124158344.
    3. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, January.
    4. Mark V. Pauly, 1994. "Universal Health Insurance in the Clinton Plan: Coverage as a Tax-Financed Public Good," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 45-53, Summer.
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    1. Donald A. P. Bundy & Nilanthi de Silva & Susan Horton & Dean T. Jamison & George C. Patton, 2017. "Disease Control Priorities, Third Edition," World Bank Publications - Books, The World Bank Group, number 28876, December.
    2. Emily Moschini, 2019. "Child Care Subsidies with One- and Two-Parent Families," 2019 Meeting Papers 42, Society for Economic Dynamics.
    3. Douglas M. Walker, 2007. "Problems in Quantifying the Social Costs and Benefits of Gambling," American Journal of Economics and Sociology, Wiley Blackwell, vol. 66(3), pages 609-645, July.
    4. Parry, Ian W.H. & Laxminarayan, Ramanan & West, Sarah E., 2006. "Fiscal and Externality Rationales for Alcohol Taxes," RFF Working Paper Series dp-06-51, Resources for the Future.
    5. William F. Shughart II & Josh T. Smith, 2020. "The broken bridge of public finance: majority rule, earmarked taxes and social engineering," Public Choice, Springer, vol. 183(3), pages 315-338, June.

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