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The marginal cost of public funds: A brief guide

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  • Bastani, Spencer

    (Research Institute of Industrial Economics (IFN); Uppsala Center for Fiscal Studies (UCFS), Uppsala Center for Labor Studies (UCLS), CESIfo, Germany)

Abstract

When deciding on the social desirability of public investment, the cost of a project is sometimes adjusted by a factor known as the Marginal Cost of Public Funds (MCP F ), which captures the cost of raising public funds through distortionary taxation. However, there is no scholarly consensus on its definition or quantification. The purpose of this paper is to provide a brief up-to-date guide to the theoretical background, practical application, and empirical quantification of the MCP F, taking into account some recent developments in the public finance literature, and highlighting the broad applicability of the MCP F beyond taxation.

Suggested Citation

  • Bastani, Spencer, 2023. "The marginal cost of public funds: A brief guide," Working Paper Series 2023:14, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    • Handle: RePEc:hhs:ifauwp:2023_014
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    More about this item

    Keywords

    benefit-cost analysis; marginal value of public funds; excess burden; distortions; public goods; taxes;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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