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The dual nature of public goods and congestion: the role of fiscal policy revisited

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  • Santanu Chatterjee
  • Sugata Ghosh

Abstract

The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption-based instruments in conjunction with the income tax. An income tax-financed increase in government spending dominates both lump-sum and consumption tax-financing. Replacing the lump-sum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.

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  • Santanu Chatterjee & Sugata Ghosh, 2011. "The dual nature of public goods and congestion: the role of fiscal policy revisited," Canadian Journal of Economics, Canadian Economics Association, vol. 44(4), pages 1471-1496, November.
    • Handle: RePEc:cje:issued:v:44:y:2011:i:4:p:1471-1496
    DOI: 10.1111/j.1540-5982.2011.01681.x
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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