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Cost-Benefit Analysis and the Marginal Cost of Public Funds

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  • Lundholm, Michael

    ()
    (Dept. of Economics, Stockholm University)

Abstract

The marginal cost of public funds defined as the ratio between the shadow price of tax revenues and the population average of the social marginal utility of income, is analysed within an explicit cost–benefit context. It is shown that for an optimal tax system the measure is always equal to one. Benefit and cost measures congruent with this definition are derived. Under optimal taxes a positive net social benefit is a necessary and sufficient condition for a project that passes the cost–benefit test. Under non–optimal taxes this is not the case: If taxes are too low a positive net social benefit is a necessary but not sufficient condition and if taxes are too high a sufficient but not necessary condition for an accepted project.

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Bibliographic Info

Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2005:3.

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Length: 21 pages
Date of creation: 31 Mar 2005
Date of revision:
Handle: RePEc:hhs:sunrpe:2005_0003

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
Phone: +46 8 16 20 00
Fax: +46 8 16 14 25
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Web page: http://www.ne.su.se/
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Keywords: Cost–benefit; optimal taxation; marginal cost of public funds;

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References

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  1. Hansson, Ingemar, 1984. " Marginal Cost of Public Funds for Different Tax Instruments and Government Expenditures," Scandinavian Journal of Economics, Wiley Blackwell, vol. 86(2), pages 115-30.
  2. P. A. Diamond, 1975. "A Many-Person Ramsey Tax Rule," Working papers 146, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Bovenberg, A.L. & Van Der Ploeg, F., 1992. "Environmental Policy, Public Finance and the Labour Market in a Second- Best World," Papers 9243, Tilburg - Center for Economic Research.
  4. Schob, Ronnie, 1994. "On Marginal Cost and Marginal Benefit of Public Funds," Public Finance = Finances publiques, , vol. 49(1), pages 87-106.
  5. Hellwig, Martin F., 1986. "The optimal linear income tax revisited," Journal of Public Economics, Elsevier, vol. 31(2), pages 163-179, November.
  6. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 447-57, July.
  7. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
  8. Wilson, John Douglas, 1991. "Optimal Public Good Provision with Limited Lump-Sum Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 153-66, March.
  9. Dixit, Avinash K & Sandmo, Angar, 1977. " Some Simplified Formulae for Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(4), pages 417-23.
  10. 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.
  11. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  12. Lars Hokonsen, 1998. "An Investigation into Alternative Representations of the Marginal Cost of Public Funds," International Tax and Public Finance, Springer, vol. 5(3), pages 329-343, July.
  13. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
  14. Svensson, Lars-Gunnar & Weibull, Jorgen W., 1986. "An upper bound on optimal income taxes," Journal of Public Economics, Elsevier, vol. 30(2), pages 165-181, July.
  15. Johansson-Stenman, Olof, 2001. "Should We Use Distributional Weights in CBA When Income Taxes Can Deal with Equity?," Working Papers in Economics 35, University of Gothenburg, Department of Economics.
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Cited by:
  1. D K Srivastava & C Bhujanga Rao, 2010. "Reforming Indirect Taxes in India : Role of Environmental Taxes," Microeconomics Working Papers 23063, East Asian Bureau of Economic Research.
  2. D K Srivastava & C Bhujanga Rao, 2010. "Reforming Indirect Taxes in India: Role of Environmental Taxes," Working Papers 2010-050, Madras School of Economics,Chennai,India.
  3. Eliasson, Jonas, 2009. "A cost-benefit analysis of the Stockholm congestion charging system," Transportation Research Part A: Policy and Practice, Elsevier, vol. 43(4), pages 468-480, May.

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