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Optimal Fiscal Policies, Congestion and Over-entry

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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. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .

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
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    Cited by:

    1. 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.
    2. repec:bpj:sndecm:v:21:y:2017:i:2:p:16:n:4 is not listed on IDEAS
    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.

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