Does Government Expenditure Crowd Out Private Consumption in Italy? Evidence from a Microeconomic Model
An abnormal expansion of the public sector may create serious problems to the market economy, as the literature suggests. This issue is quite important in countries such as Italy where the size of the public sector and of its debt are quite relevant. In this paper a model, in the microeconomic tradition, is developed and applied to the italian economy using a quite general utility function to represent consumer's behaviour. The aim of the article is to set up a methological framework in which to test for the hypothesis that the provision of public and impure public goods crowds out private consumption. The main result of the analysis is that, in Italy, traditional public goods play a neutral role in expenditure decisions while impure public goods crowd out private consumption. This crowding out is created by over-production of these services; merit goods are direct complements to a wide range of private goods, but this beneficial effect is more than offset by the negative income effect related to their financing.
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Volume (Year): 13 (1999)
Issue (Month): 2 ()
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