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Relative-Income Effects and the Appropriate Level of Public Expenditure

  • Ng, Yew-Kwang

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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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 39 (1987)
Issue (Month): 2 (June)
Pages: 293-300

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Handle: RePEc:oup:oxecpp:v:39:y:1987:i:2:p:293-300
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