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Optimal Provision of Public Goods: A Synthesis

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  • Claus Thustrup Kreiner
  • Nicolaj Verdelin

Abstract

There currently exist two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxation and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demonstrating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of a public good without imposing strong assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are completely different and the traditional formula with its emphasis on MCF only obtains in a very special case.
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Suggested Citation

  • Claus Thustrup Kreiner & Nicolaj Verdelin, 2012. "Optimal Provision of Public Goods: A Synthesis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 384-408, June.
  • Handle: RePEc:bla:scandj:v:114:y:2012:i:2:p:384-408
    DOI: j.1467-9442.2011.01686.x
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    References listed on IDEAS

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    Cited by:

    1. Niehaus, Paul & Sukhtankar, Sandip, 2013. "The marginal rate of corruption in public programs: Evidence from India," Journal of Public Economics, Elsevier, vol. 104(C), pages 52-64.
    2. Thomas Bue Bjørner & Jørgen Brandt & Lars Gårn Hansen & Martin Groth Hjelmsø & Marianne Nygaard Källstrøm, 2016. "Regulation of air pollution from wood-burning stoves," IFRO Working Paper 2016/11, University of Copenhagen, Department of Food and Resource Economics.
    3. Andersen, Torben M & Kreiner, Claus Thustrup, 2013. "Baumol’s cost disease and the sustainability of the welfare state," CEPR Discussion Papers 9772, C.E.P.R. Discussion Papers.
    4. repec:bla:econom:v:84:y:2017:i:335:p:417-429 is not listed on IDEAS
    5. Antonio Russo, 2015. "Pricing of Transport Networks, Redistribution, and Optimal Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(5), pages 605-640, October.
    6. Felix J. Bierbrauer, 2014. "Optimal Tax and Expenditure Policy with Aggregate Uncertainty," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 205-257, February.
    7. Mogens Fosgerau & Kurt Van Dender, 2013. "Road pricing with complications," Transportation, Springer, vol. 40(3), pages 479-503, May.

    More about this item

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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