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Optimal Fiscal Policies, Congestion and Over‐entry

Author

Listed:
  • Juin‐jen Chang
  • Hsiao‐wen Hung
  • Jhy‐yuan Shieh
  • Ching‐chong Lai

Abstract

By shedding light on market imperfections and the congestion of public goods, we show that free entry in a market equilibrium will lead to excessive entry relative to the social optimum. Moreover, by specifying a generalized congestion function, it is also shown that different fiscal policies, including labor income tax, capital income tax and government expenditure, play a distinct role in terms of remedying market distortions. Specifically, optimal income taxes decrease with the degree of market imperfections in order to remove the monopoly inefficiency, while they increase with the degree of congestion in order to remedy the adverse externality caused by congestion distortion. Since a higher degree of increasing returns to an expansion in the variety of intermediate goods is found to intensify the congestion effect of government infrastructure expenditure, the optimal rule of government expenditure proposed by Barro (1990) should be modified.

Suggested Citation

  • Juin‐jen Chang & Hsiao‐wen Hung & Jhy‐yuan Shieh & Ching‐chong Lai, 2007. "Optimal Fiscal Policies, Congestion and Over‐entry," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 137-151, March.
    • Handle: RePEc:bla:scandj:v:109:y:2007:i:1:p:137-151
    DOI: 10.1111/j.1467-9442.2007.00484.x
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    Cited by:

    1. Chang Cheng-Wei & Lai Ching-Chong, 2017. "Macroeconomic (in)stability and endogenous market structure with productive government expenditure," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(2), pages 1-16, April.
    2. Cheng-wei Chang & Ching-chong Lai, 2021. "Optimal fiscal policies and market structures with monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1385-1411, December.
    3. Chien-Yin Chen & Fu-Sheng Hung, 2012. "Monopolistic Competition and Increasing Returns: Implications for Optimal Fiscal Policies and Over-entry," Economics Bulletin, AccessEcon, vol. 32(2), pages 1142-1150.
    4. Hsieh Hui-ting & Lai Ching-chong & Chen Kuan-jen, 2015. "A Macroeconomic Model of Imperfect Competition with Patent Licensing," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(4), pages 1579-1618, October.
    5. Cheng-Wei Chang & Ching-Chong Lai & Juin-Jen Chang, 2018. "Fiscal Stimulus and Endogenous Firm Entry in a Monopolistic Competition Macroeconomic Model," The Japanese Economic Review, Springer, vol. 69(2), pages 207-225, June.

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