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On the optimal level of public inputs

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  • Diego Martinez Lopez

    ()
    (Department of Economics, Universidad Pablo de Olavide)

  • A. Jesus Sanchez Fuentes

    ()
    (Department of Economics, Universidad Pablo de Olavide)

Abstract

This paper studies the optimal level of public inputs under two different tax settings. With this aim, we adapt the approach by Gronberg and Liu (2001) to the case of productivity-enhancing public spending. We find that it is not analytically clear whether the first-best level of public spending exceeds the second-best level. After taking account the type of public input, a wide numerical simulation has been carried out. We obtain that the second-best level is always below the first-best level but the criterion by Gronberg and Liu has to be qualified.

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File URL: http://www.upo.es/serv/bib/wps/econ0634.pdf
File Function: First version, 2006
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File URL: http://www.upo.es/serv/bib/wps/econ0634R.pdf
File Function: Revised version, 2008
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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 06.34.

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Length: 20 pages
Date of creation: Dec 2006
Date of revision: Mar 2008
Handle: RePEc:pab:wpaper:06.34

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Keywords: Second best; excess burden; public input.;

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References

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  1. Kay, J. A., 1980. "The deadweight loss from a tax system," Journal of Public Economics, Elsevier, vol. 13(1), pages 111-119, February.
  2. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  3. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Sandmo, Agnar, 1972. "Optimality rules for the provision of collective factors of production," Journal of Public Economics, Elsevier, vol. 1(1), pages 149-157, April.
  5. 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.
  6. Browning, Edgar K & Gronberg, Timothy & Liu, Liqun, 2000. "Alternative Measures of the Marginal Cost of Funds," Economic Inquiry, Western Economic Association International, vol. 38(4), pages 591-99, October.
  7. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 227-43, April.
  8. A. Jesus Sanchez Fuentes & Diego Martinez Lopez, 2006. "A new approach to solve non-regular constrained optimization problems. An application to optimal provision of public inputs," Working Papers 06.35, Universidad Pablo de Olavide, Department of Economics.
  9. Gronberg, Timothy & Liu, Liqun, 2001. " The Second-Best Level of a Public Good: An Approach Based on the Marginal Excess Burden," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 3(4), pages 431-53.
  10. Gaube, Thomas, 2000. "When do distortionary taxes reduce the optimal supply of public goods?," Journal of Public Economics, Elsevier, vol. 76(2), pages 151-180, May.
  11. Ming Chang, 2000. "Rules and Levels in the Provision of Public Goods: The Role of Complementarities between the public Good and Taxed Commodities," International Tax and Public Finance, Springer, vol. 7(1), pages 83-91, February.
  12. Pestieau, Pierre, 1978. "Public intermediate goods and distortionary taxation," European Economic Review, Elsevier, vol. 7(4), pages 351-357, May.
  13. Thomas Gaube, 2005. "Financing Public Goods with Income Taxation: Provision Rules vs. Provision Level," International Tax and Public Finance, Springer, vol. 12(3), pages 319-334, May.
  14. James P. Feehan, 2002. "Distortionary Taxation and Optimal Public Spending on Productive Activities," Economic Inquiry, Western Economic Association International, vol. 40(1), pages 60-68, January.
  15. Feehan, James P, 1989. "Pareto-Efficiency with Three Varieties of Public Input," Public Finance = Finances publiques, , vol. 44(2), pages 237-48.
  16. Triest, Robert K, 1990. "The Relationship between the Marginal Cost of Public Funds and Marginal Excess Burden," American Economic Review, American Economic Association, vol. 80(3), pages 557-66, June.
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Citations

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Cited by:
  1. Martinez, Diego & Sjögren, Tomas, 2013. "Can Labor Market Imperfections Cause Overprovision of Public Inputs?," UmeÃ¥ Economic Studies 858, Umeå University, Department of Economics.
  2. A. Sanchez & Diego Martinez, 2011. "Optimization in Non-Standard Problems. An Application to the Provision of Public Inputs," Computational Economics, Society for Computational Economics, vol. 37(1), pages 13-38, January.
  3. A. Jesus Sanchez Fuentes & Diego Martinez Lopez, 2006. "A new approach to solve non-regular constrained optimization problems. An application to optimal provision of public inputs," Working Papers 06.35, Universidad Pablo de Olavide, Department of Economics.

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