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The Welfare Analysis of Fiscal Policy: A Simple Unified Account

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Author Info

  • James E. Anderson

    () (Boston College)

  • Will Martin

    (World Bank)

Abstract

A simple general equilibrium model of an economy with distortionary taxes and public goods is used to extend, unify and clean up the welfare analysis of changes in taxation, redistribution and the provision of public goods. We clarify the distinction between compensation and money metric measures of the welfare impact of fiscal changes and show that the equivalent variation measure dominates other measures. We provide an integrated approach to marginal tax and public good changes when public goods have real resource costs and must be financed by distortionary taxation using the concepts of the marginal cost of funds, the fiscal price of public goods and the virtual price of public goods. Here too, the compensation version of these concepts dominates the money metric version.

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File URL: http://fmwww.bc.edu/EC-P/wp316.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 316..

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Length: 33 pages
Date of creation: 01 Jan 1996
Date of revision:
Handle: RePEc:boc:bocoec:316

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Web page: http://fmwww.bc.edu/EC/
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Related research

Keywords: Marginal cost of funds; fiscal price; virtual price; duality;

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References

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  1. Anderson, James E & Neary, J Peter, 1992. "Trade Reform with Quotas, Partial Rent Retention, and Tariffs," Econometrica, Econometric Society, vol. 60(1), pages 57-76, January.
  2. Mayshar, Joram, 1990. "On measures of excess burden and their application," Journal of Public Economics, Elsevier, vol. 43(3), pages 263-289, December.
  3. Neary, J.P & Roberts, K.W.S, 1978. "The Theory of Household Behaviour under Rationing," The Warwick Economics Research Paper Series (TWERPS) 132, University of Warwick, Department of Economics.
  4. Fullerton, Don, 1991. "Reconciling Recent Estimates of the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 302-08, March.
  5. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, in: Hollis Chenery† & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137 Elsevier.
  6. Alan J. Auerbach, 1986. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  7. Fane, George, 1991. "The Social Opportunity Cost of Foreign Exchange: A Partial Defence of Harberger et al," The Economic Record, The Economic Society of Australia, vol. 67(199), pages 307-16, December.
  8. Goldin,Ian & Winters,L. Alan (ed.), 1992. "Open Economies," Cambridge Books, Cambridge University Press, number 9780521420563.
  9. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
  10. Schob, Ronnie, 1994. "On Marginal Cost and Marginal Benefit of Public Funds," Public Finance = Finances publiques, , vol. 49(1), pages 87-106.
  11. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
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Citations

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Cited by:
  1. James E. Anderson & Will Martin, 2011. "Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(2), pages 289-309, 04.
  2. Alam, Mohammad Jahangir & Buysse, Jeroen & Begum, Ismat Ara & Nolte, Stephan & Wailes, Eric J. & Van Huylenbroeck, Guido, 2012. "Impact of Trade Liberalization and World Price Changes in Bangladesh: A Computable General Equilibrium Analysis," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 123724, International Association of Agricultural Economists.
  3. Bach, Christian F. & Martin, Will, 2001. "Would the right tariff aggregator for policy analysis please stand up?," Journal of Policy Modeling, Elsevier, vol. 23(6), pages 621-635, August.
  4. Salvatici, Luca & Cipollina, Maria, 2006. "Measuring Protection: Mission Impossible?," Working Papers 18876, TRADEAG - Agricultural Trade Agreements.
  5. Martin, Will & Anderson, James E., 2005. "Costs of taxation and the benefits of public goods : the role of income effects," Policy Research Working Paper Series 3700, The World Bank.
  6. James E. Anderson, 1997. "Trade Reform with a Government Budget Constraint," Boston College Working Papers in Economics 348., Boston College Department of Economics.
  7. John C. Beghin & Jean-Christophe Bureau & Sung Joon Park, 2001. "Food Security and Agricultural Protection in South Korea," Food and Agricultural Policy Research Institute (FAPRI) Publications 01-wp284, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
  8. Fukase, Emiko & Martin, Will, 1999. "The effect of the United States'granting Most Favored Nation status to Vietnam," Policy Research Working Paper Series 2219, The World Bank.
  9. Emiko Fukase & Will Martin, 2000. "The effects of the United States granting MFN status to Vietnam," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(3), pages 539-559, 09.
  10. Anderson, James E. & Martin, Will, 1998. "Evaluating public expenditures when governments must rely on distortionary taxation," Policy Research Working Paper Series 1981, The World Bank.
  11. Can Erbil, 2004. "Trade Taxes Are Expensive," International Trade 0409002, EconWPA.
  12. Beghin, John C. & Bureau, Jean-Christophe & Park, Sung Joon, 2002. "The Cost of Food Self-Sufficiency and Agricultural Protection in South Korea," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24879, European Association of Agricultural Economists.

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