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The marginal cost of funds with nonseparable public spending

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  • Shaghil Ahmed
  • Dean Croushore

Abstract

This article provides new calculations of the welfare effects of fiscal changes when the publicly provided good is nonseparable in utility and production so that it affects economic agents' marginal decisions. The authors' results show that these nonseparabilities significantly alter the marginal cost of funds (MCF) that previous studies have calculated. The authors also report estimates of the nonseparable marginal benefits (NSMB) associated with aggregate government purchases. The net marginal cost offunds (NMCF ), which is equal to MCF - NSMB, is in general positive over a wide range of parameter values that encompass empirically relevant specifications. Thus the nonseparable benefits by themselves are not sufficient for a marginal increase in aggregate government purchases of goods and services to be worthwhile.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 94-5.

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Date of creation: 1994
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Handle: RePEc:fip:fedpwp:94-5

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Keywords: Expenditures; Public;

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Cited by:
  1. Devarajan, Shantayanan & Robinson, Sherman, 2002. "The influence of computable general equilibrium models on policy," TMD discussion papers, International Food Policy Research Institute (IFPRI) 98, International Food Policy Research Institute (IFPRI).
  2. Liu, Liqun, 2003. "A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate," Journal of Public Economics, Elsevier, Elsevier, vol. 87(7-8), pages 1707-1718, August.
  3. Strand, Jon, 2009. ""Revenue management"effects related to financial flows generated by climate policy," Policy Research Working Paper Series, The World Bank 5053, The World Bank.
  4. Warlters, Michael & Auriol, Emmanuelle, 2005. "The marginal cost of public funds in Africa," Policy Research Working Paper Series, The World Bank 3679, The World Bank.
  5. Kaplow, Louis, 2006. "Public goods and the distribution of income," European Economic Review, Elsevier, Elsevier, vol. 50(7), pages 1627-1660, October.
  6. Auriol, Emmanuelle & Warlters, Michael, 2012. "The marginal cost of public funds and tax reform in Africa," Journal of Development Economics, Elsevier, Elsevier, vol. 97(1), pages 58-72.
  7. José Manuel González Páramo, 2003. "Midiendo el coste marginal en bienestar de una reforma impositiva," Hacienda Pública Española, IEF, IEF, vol. 166(3), pages 115-147, September.
  8. José Manuel González-Páramo, . "Midiendo El Coste Marginal En Bienestar De Una Reforma Impositiva," Working Papers, Instituto de Estudios Fiscales 32-02 Classification-JEL , Instituto de Estudios Fiscales.
  9. Can Erbil, 2004. "Trade Taxes Are Expensive," International Trade, EconWPA 0409002, EconWPA.
  10. Louis Kaplow, 1993. "Should the Government's Allocation Branch be Concerned about the Distortionary Cost of Taxation and Distributive Effects?," NBER Working Papers 4566, National Bureau of Economic Research, Inc.

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