Distributional Impact of Government Expenditure - A Welfare Indicator Approach

Existing approaches and empirical estimation of distributional impact of government expenditure so far have been heavily dependent on several restrictive assumptions which are questionable particularly for the developing countries where phenomena of externalities and indivisibilities play a vital role. Such approaches can, therefore, seriously distort not only the evaluation of government expenditure policies but also their future directions. In the present paper we develop a simple model based on a new welfare indicator approach. Such an approach avoids almost all the restrictive unrealistic assumptions of the earlier approaches. Our approach considers basic welfare which is the minimum desired welfare level rather than the total achievable welfare level of the population. The theoretical framework developed in the present paper is also extended to analyse the government expenditure policy questions if the empirical estimates based on our approach are available for the economy.