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Product market integration, tax distortions and public sector size


  • Torben M. Andersen

    () (Department of Economics and Business, Aarhus University)

  • Allan Sørensen

    () (Department of Economics and Business, Aarhus University
    Department of Economics and Business, Aarhus University)


The implications of product market integration for public sector activities (transfers and public consumption) are considered in a standard setting. The analysis supports that a larger public sector (higher tax rate) tends to increase wages and worsen wage competitiveness. However, the implications of product market integration for the public sector are far from straightforward. The reason is gains-from-trade effects which tend to increase the tax base and decrease the opportunity costs of public consumption (marginal utility of private consumption falls). It follows that the retrenchment view that product market integration inevitable leads to a downward pressure on public sector activities does not get support in a standard setting. A particularly noteworthy ?finding is that a country with a large public sector (strong preferences for public consumption) may bene?fit more by integrating with a country with a smaller public sector (weak preferences for public consumption).

Suggested Citation

  • Torben M. Andersen & Allan Sørensen, 2013. "Product market integration, tax distortions and public sector size," Economics Working Papers 2013-28, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2013-28

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    References listed on IDEAS

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    More about this item


    labour taxation; product market integration; public sector; policy spill-over;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • F1 - International Economics - - Trade
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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