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The Welfare Analysis of Fiscal Policy: A Simple Unified Account

  • James E. Anderson

    ()

    (Boston College)

  • Will Martin

    (World Bank)

A simple general equilibrium model of an economy with distortionary taxes and public goods is used to extend, unify and clean up the welfare analysis of changes in taxation, redistribution and the provision of public goods. We clarify the distinction between compensation and money metric measures of the welfare impact of fiscal changes and show that the equivalent variation measure dominates other measures. We provide an integrated approach to marginal tax and public good changes when public goods have real resource costs and must be financed by distortionary taxation using the concepts of the marginal cost of funds, the fiscal price of public goods and the virtual price of public goods. Here too, the compensation version of these concepts dominates the money metric version.

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File URL: http://fmwww.bc.edu/EC-P/wp316.pdf
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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 316..

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Length: 33 pages
Date of creation: 01 Jan 1996
Date of revision:
Handle: RePEc:boc:bocoec:316
Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
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Web page: http://fmwww.bc.edu/EC/
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  1. Fullerton, Don, 1991. "Reconciling Recent Estimates of the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 302-08, March.
  2. repec:cup:cbooks:9780521420563 is not listed on IDEAS
  3. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  4. Alan J. Auerbach, 1982. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  5. Mayshar, Joram, 1990. "On measures of excess burden and their application," Journal of Public Economics, Elsevier, vol. 43(3), pages 263-289, December.
  6. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
  7. Schob, Ronnie, 1994. "On Marginal Cost and Marginal Benefit of Public Funds," Public Finance = Finances publiques, , vol. 49(1), pages 87-106.
  8. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
  9. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137 Elsevier.
  10. Fane, George, 1991. "The Social Opportunity Cost of Foreign Exchange: A Partial Defence of Harberger et al," The Economic Record, The Economic Society of Australia, vol. 67(199), pages 307-16, December.
  11. Anderson, James E & Neary, J Peter, 1992. "Trade Reform with Quotas, Partial Rent Retention, and Tariffs," Econometrica, Econometric Society, vol. 60(1), pages 57-76, January.
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