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Relative-Income Effects and the Appropriate Level of Public Expenditure

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  • Ng, Yew-Kwang

Abstract

The welfare of an individual depends not only on his own income but also on his income relative to that of others. A private good that he consumes yields him (intrinsic consumption and relative-income) utilities, but also imposes external costs on others through the relative-income effects. Expenditure on public goods not only produces intrinsic consumption utilities but also indirect relative-income utilities by reducing private expenditure. Since this indirect effect is unlikely to be adequately accounted for, the "optimal" level of public expenditure estimated by the conventional SMRS 3 MRT is really suboptimal. Copyright 1987 by Royal Economic Society.

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  • Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June.
    • Handle: RePEc:oup:oxecpp:v:39:y:1987:i:2:p:293-300
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