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Can Fiscal Externalities Be Internalized?

Author

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  • Erzo F.P. Luttmer

Abstract

Subsidies and in-kind transfers give rise to negative fiscal externalities. However, internalizing negative fiscal externalities through taxation would undo the subsidy or in-kind transfer that caused them. Similarly, positive fiscal externalities cannot be internalized though government subsidies. This paper describes a mechanism that transfers fiscal externalities from the government to private parties. Such transfers generate incentives within the private sector to reduce inefficiencies caused by fiscal externalities. Thus, the paper offers a straightforward, but powerful, insight: transferring fiscal externalities to third parties extends the reach of the Coase Theorem to inefficiencies stemming from fiscal externalities.

Suggested Citation

  • Erzo F.P. Luttmer, 2022. "Can Fiscal Externalities Be Internalized?," NBER Working Papers 30213, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30213
    Note: PE
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    Cited by:

    1. Christophe Blot & Jérôme Creel, 2023. "Soft or strong: the art of monetary tightening," SciencePo Working papers Main hal-03954545, HAL.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O35 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Social Innovation

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