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The welfare state and Baumol’s law

  • Martin Paldam


    (School of Economics and Management, University of Aarhus, Denmark)

The paper considers a two-sector economy with a constant population: The public sector, with stable productivity, and a private sector, with productivity growth. Baumol’s law says that such an economy has no steady state. It is demonstrated what this means. Two attempts to uphold a policy that fixes a key ratio are discussed: One policy fixes the tax share - this causes the share of the real public sector to vanish. The other policy fixes the share of real public production - this causes the tax pressure to keep rising.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2009-05.

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Length: 16
Date of creation: 24 Mar 2009
Date of revision:
Handle: RePEc:aah:aarhec:2009-05
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