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Excess burden and the cost of inefficiency in public services provision

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Author Info
António Afonso () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Vítor Gaspar () (Banco de Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisbon, Portugal.)

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Abstract

In this paper we revisit the literature on the economic consequences from inefficiency in public services provision. Following Dupuit (1844) and Pigou (1947) we argue that it is important to take the financing side explicitly into account. The fact that public expenditure financing must rely on distortional taxation implies that both direct and indirect costs are relevant when estimating the economic impacts of inefficiency in public services provision. Using Hicks’ compensating variation (following Diamond and McFadden (1974) and Auerbach (1985)) we show that these magnification mechanisms are not only conceptually relevant, they are also important from a quantitative point of view. Specifically, we rely on a range of estimates of public sector efficiency (from Afonso, Schuknecht and Tanzi (2005, 2006)) to illustrate numerically that the relative importance of indirect costs of public sector provision inefficiency, linked to financing through distortional taxation increases with the magnitude of the inefficiency. JEL Classification: D11; E62; H21; H50.

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Paper provided by European Central Bank in its series Working Paper Series with number 601.

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Length: 43 pages
Date of creation: Apr 2006
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Handle: RePEc:ecb:ecbwps:20060601

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Related research
Keywords: Government efficiency; excess burden; taxes; spending.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. António Afonso & Ludger Schuknecht & Vito Tanzi, 2006. "Public sector efficiency: evidence for new EU member states and emerging markets," Working Paper Series 581, European Central Bank. [Downloadable!]
    Other versions:
  2. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 2-13. [Downloadable!]
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  3. Li, Hongzhe, 2006. "Comment," Journal of the American Statistical Association, American Statistical Association, vol. 101, pages 114-115, March. [Downloadable!] (restricted)
  4. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 119-28, January. [Downloadable!] (restricted)
  5. Ana Lamo & Julián Messina & Etienne Wasmer, 2006. "Are specific skills an obstacle to labor market adjustment? Theory and an application to the EU enlargement," Working Paper Series 585, European Central Bank. [Downloadable!]
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  6. António Afonso & Ludger Schuknecht & Vito Tanzi, 2005. "Public sector efficiency: An international comparison," Public Choice, Springer, vol. 123(3), pages 321-347, June. [Downloadable!] (restricted)
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  7. Afonso, Antonio & St. Aubyn, Miguel, 2006. "Cross-country efficiency of secondary education provision: A semi-parametric analysis with non-discretionary inputs," Economic Modelling, Elsevier, vol. 23(3), pages 476-491, May. [Downloadable!] (restricted)
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  8. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April. [Downloadable!] (restricted)
  9. Alan J. Auerbach, 1986. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Robert J. Tetlow & Peter von zur Muehlen, 2005. "Robustifying learnability," Finance and Economics Discussion Series 2005-58, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  11. S. Fred Singer, 2006. "Comment," World Economics, World Economics, Economic & Financial Publishing, PO Box 69, Henley-on-Thames, Oxfordshire, United Kingdom, RG9 1GB, vol. 7(3), pages 185-188, July. [Downloadable!]
  12. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Stiglitz, Joseph E & Dasgupta, P, 1971. "Differential Taxation, Public Goods and Economic Efficiency," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 151-74, April. [Downloadable!] (restricted)
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  14. Ignazio Angeloni & Luc Aucremanne & Matteo Ciccarelli, 2006. "Price setting and inflation persistence: did EMU matter?," Working Paper Series 597, European Central Bank. [Downloadable!]
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  15. Michael Ehrmann, 2006. "Rational inattention, inflation developments and perceptions after the euro cash changeover," Working Paper Series 588, European Central Bank. [Downloadable!]
  16. António Afonso & Miguel St. Aubyn, 2005. "Non-parametric approaches to education and health efficiency in OECD countries," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 227-246, November. [Downloadable!]
  17. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February. [Downloadable!] (restricted)
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  1. António Afonso & Ludger Schuknecht & Vito Tanzi, 2006. "Public Sector Efficiency: Evidence for New EU Member States and Emerging Markets," Working Papers 2006/01, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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