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The Marginal Cost of Funds and the Shadow Prices of Public Sector Inputs and Outputs

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  • Liqun Liu

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Abstract

Existing studies on the marginal cost of funds (MCF) do not incorporate the public sector inputs explicitly. Incorporating labor and capital as public sector inputs raises questions concerning the definition and the usage of the MCF, and its relation to public sector shadow prices. This paper finds that the MCF should be defined based on the excess revenue rather than the gross revenue; that general equilibrium effects on individuals' net income and government's inframarginal expenditures should be incorporated; and that the MCF measures an element in the shadow price that is solely attributable to the marginal financing, justifying the role of the MCF in cost-benefit analysis and tax reform. Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • Liqun Liu, 2004. "The Marginal Cost of Funds and the Shadow Prices of Public Sector Inputs and Outputs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 17-29, January.
  • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:1:p:17-29
    DOI: 10.1023/B:ITAX.0000004775.40515.f6
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Dan Usher, 2006. "Should the Samuelson Rule Be Modified to Account for the Marginal Cost of Public Funds?," Working Papers 1065, Queen's University, Department of Economics.
    2. James E. Anderson & Will Martin, 2011. "Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(2), pages 289-309, April.
    3. Shun-ichiro Bessho & Masayoshi Hayashi, 2013. "Estimating the Social Marginal Cost of Public Funds," Public Finance Review, , vol. 41(3), pages 360-385, May.
    4. Diego Martínez López & A. Jesús Sánchez Fuentes, "undated". "Optimal Provision Of Public Inputs In A Second Best Scenario (*)," Working Papers 17-05 Classification-JEL , Instituto de Estudios Fiscales.
    5. Hisahiro Naito, 2016. "Optimal Shadow Prices for the Public Sector in the Presence of a Non-linear Income Tax System in an Open Economy," Tsukuba Economics Working Papers 2016-003, Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba.
    6. Liqun Liu, 2005. "The Multi-Period Cost-Benefit Rule with Mobile Capital and Distorted Labor," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(2), pages 145-158, March.

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    Keywords

    marginal cost of funds; shadow prices;

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