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Optimal Provision of Public Goods: A Synthesis

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Author Info
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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2538.

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

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Related research
Keywords: public good provision; distortionary taxation; distribution;

Find related papers by JEL classification:
H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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    Other versions:
  3. Roger Gordon & Wei Li, 2005. "Tax Structure in Developing Countries: Many Puzzles and a Possible Explanation," NBER Working Papers 11267, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. 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, vol. 19(4), pages 233-233, Fall. [Downloadable!] (restricted)
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  11. Stéphane Gauthier ; Guy Laroque, 2008. "Separability and Public Finance," Working Papers 2008-24, Centre de Recherche en Economie et Statistique, revised 2008. [Downloadable!]
    Other versions:
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  15. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January. [Downloadable!] (restricted)
  16. Louis Kaplow & Steven Shavell, 2002. "On the Superiority of Corrective Taxes to Quantity Regulation," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 1-17, January.
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  17. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
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  18. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Blackwell Publishing, vol. 48(3), pages 447-57, July. [Downloadable!] (restricted)
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  20. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Blackwell Publishing, vol. 68(1), pages 205-29, January.
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  21. Louis Kaplow, 2006. "Optimal Control of Externalities in the Presence of Income Taxation," NBER Working Papers 12339, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  22. Saez, Emmanuel, 2002. "The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes," Journal of Public Economics, Elsevier, vol. 83(2), pages 217-230, February. [Downloadable!] (restricted)
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  23. Gahvari, Firouz, 2006. "On the marginal cost of public funds and the optimal provision of public goods," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1251-1262, August. [Downloadable!] (restricted)
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