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Why the Marginal Social Cost of Funds is not the Shadow Value of Government Revenue

  • Chris Jones

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    No distinction is made between the marginal social cost of public funds (MCF) and the shadow value of government revenue in the public finance literature. Their separate roles are demonstrated in this paper, where the MCF is used as a scaling coefficient to account for changes in tax inefficiency on revenue transfers made to balance the government budget, while the shadow value of government revenue is used as a scaling coefficient to convert efficiency effects into actual changes in utility. We find a revenue effect identified by Atkinson and Stern (1974) and Dahlby (1998) in the shadow value of government revenue which is not present in the MCF. It is the reason why, in the presence of distorting taxes, the shadow value of government revenue can differ from unity, whereas the MCF is always unity, for a lump-sum tax.

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    File URL: http://cbe.anu.edu.au/researchpapers/econ/wp449.pdf
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    Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2005-449.

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    Length: 21 pages
    Date of creation: May 2005
    Date of revision:
    Handle: RePEc:acb:cbeeco:2005-449
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