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Vertical externalities in the provision of public inputs

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Abstract

This paper studies the provision of public inputs in a federal system. A vertical tax externality is also considered. A simple general equilibrium model is used to analyze the efficiency of the equilibria under different scenarios. The results show that the state provision of public inputs may affect ambiguously federal tax revenues, depending on vertical tax externality, among others things. Moreover, it is proved that achieving a second best allocation is not straightforward for a federal government that plays a Stackelberg leader.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/47.

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Length: 21 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:cea:doctra:e2004_47

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Keywords: Fiscal federalism; vertical externality; productive public spending.;

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  1. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
  2. Johnson, William R, 1988. "Income Redistribution in a Federal System," American Economic Review, American Economic Association, vol. 78(3), pages 570-73, June.
  3. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  4. James P. Feehan, 2002. "Distortionary Taxation and Optimal Public Spending on Productive Activities," Economic Inquiry, Western Economic Association International, vol. 40(1), pages 60-68, January.
  5. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
  6. Boadway, R & Keen, M, 1996. "Efficiency and the optimal direction of federal-state transfers," IFS Working Papers W96/01, Institute for Fiscal Studies.
  7. Robin Boadway & Michael Keen, 1999. "Redistribution," Working Papers 983, Queen's University, Department of Economics.
  8. B. Dahlby & L. S. Wilson, 1994. "Fiscal Capacity, Tax Effort, and Optimal Equalization Grants," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 657-72, August.
  9. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Motohiro Sato, 2000. "Fiscal Externalities and Efficient Transfers in a Federation," International Tax and Public Finance, Springer, vol. 7(2), pages 119-139, March.
  11. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
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