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Optimal Provision of Public Goods: A Synthesis

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  • Claus Thustrup Kreiner
  • Nicolaj Verdelin

Abstract

There currently exist two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxation and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demonstrating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of a public good without imposing strong assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are completely different and the traditional formula with its emphasis on MCF only obtains in a very special case.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2538.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2538

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Keywords: public good provision; distortionary taxation; distribution;

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References

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  1. Joseph E. Stiglitz & Partha Dasgupta, 1970. "Differential Taxation, Public Goods, and Economic Efficiency," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 299, Cowles Foundation for Research in Economics, Yale University.
  2. Louis Kaplow & Steven Shavell, 1997. "On the Superiority of Corrective Taxes to Quantity Regulation," NBER Working Papers 6251, National Bureau of Economic Research, Inc.
  3. Louis Kaplow, 2004. "On the (Ir)Relevance of Distribution and Labor Supply Distortion to Government Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(4), pages 159-175, Fall.
  4. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, Elsevier, vol. 84(1), pages 1-32, April.
  5. Louis Kaplow, 2008. "Optimal Policy with Heterogeneous Preferences," NBER Working Papers 14170, National Bureau of Economic Research, Inc.
  6. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(3), pages 447-57, July.
  7. Slemrod, Joel & Yitzhaki, Shlomo, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," National Tax Journal, National Tax Association, vol. 54(n. 2), pages 189-202, June.
  8. S�ren Blomquist & Vidar Christiansen & Luca Micheletto, 2010. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 2(2), pages 1-27, May.
  9. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  10. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, Elsevier, vol. 67(1), pages 105-122, January.
  11. Charles L. Ballard & Don Fullerton, 1993. "Distortionary Taxes and the Provision of Public Goods," NBER Working Papers 3506, National Bureau of Economic Research, Inc.
  12. Lans Bovenberg, A. & Jacobs, Bas, 2005. "Redistribution and education subsidies are Siamese twins," Journal of Public Economics, Elsevier, Elsevier, vol. 89(11-12), pages 2005-2035, December.
  13. Saez, Emmanuel, 2002. "The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes," Journal of Public Economics, Elsevier, Elsevier, vol. 83(2), pages 217-230, February.
  14. Stéphane Gauthier & Guy Laroque, 2008. "Separability and Public Finance," Working Papers, Centre de Recherche en Economie et Statistique 2008-24, Centre de Recherche en Economie et Statistique.
  15. Lawrence H. Goulder & Ian W. H. Parry & Roberton C. Williams III, 2005. "Evaluating Public Goods and Regulations: Comments," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 19(4), pages 233-233, Fall.
  16. Christiansen, Vidar, 2007. "Two Approaches to Determine Public Good Provision under Distortionary Taxation," National Tax Journal, National Tax Association, vol. 60(1), pages 25-43, March.
  17. Louis Kaplow, 2006. "Optimal Control of Externalities in the Presence of Income Taxation," NBER Working Papers 12339, National Bureau of Economic Research, Inc.
  18. Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc.
  19. Boadway, Robin & Keen, Michael, 1993. "Public Goods, Self-Selection and Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 463-78, August.
  20. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, Elsevier, vol. 90(10-11), pages 1955-1973, November.
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  22. Hylland, Aanund & Zeckhauser, Richard, 1979. " Distributional Objectives Should Affect Taxes but not Program Choice or Design," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 81(2), pages 264-84.
  23. Gahvari, Firouz, 2006. "On the marginal cost of public funds and the optimal provision of public goods," Journal of Public Economics, Elsevier, Elsevier, vol. 90(6-7), pages 1251-1262, August.
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  25. repec:dgr:uvatin:2005036 is not listed on IDEAS
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Cited by:
  1. Felix J. Bierbrauer, 2014. "Optimal Tax and Expenditure Policy with Aggregate Uncertainty," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 6(1), pages 205-57, February.
  2. Niehaus, Paul & Sukhtankar, Sandip, 2013. "The marginal rate of corruption in public programs: Evidence from India," Journal of Public Economics, Elsevier, Elsevier, vol. 104(C), pages 52-64.
  3. Mogens Fosgerau & Kurt van Dender, 2010. "Road Pricing with Complication," OECD/ITF Joint Transport Research Centre Discussion Papers 2010/2, OECD Publishing.

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