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Cost-Benefit Analysis and the Marginal Cost of Public Funds


  • Lundholm, Michael

    () (Dept. of Economics, Stockholm University)


The marginal cost of public funds defined as the ratio between the shadow price of tax revenues and the population average of the social marginal utility of income, is analysed within an explicit cost–benefit context. It is shown that for an optimal tax system the measure is always equal to one. Benefit and cost measures congruent with this definition are derived. Under optimal taxes a positive net social benefit is a necessary and sufficient condition for a project that passes the cost–benefit test. Under non–optimal taxes this is not the case: If taxes are too low a positive net social benefit is a necessary but not sufficient condition and if taxes are too high a sufficient but not necessary condition for an accepted project.

Suggested Citation

  • Lundholm, Michael, 2005. "Cost-Benefit Analysis and the Marginal Cost of Public Funds," Research Papers in Economics 2005:3, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2005_0003

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    References listed on IDEAS

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    Cited by:

    1. D K Srivastava & C Bhujanga Rao, 2010. "Reforming Indirect Taxes in India : Role of Environmental Taxes," Microeconomics Working Papers 23063, East Asian Bureau of Economic Research.
    2. Jung, Anna & Thöne, Michael & Elschner, Christina & Ernst, Christof & Overesch, Michael & Bergs, Christian & Schaefer, Thilo, 2009. "Evaluierung von Steuervergünstigungen. Band 3: Evaluierungsberichte (zweiter Teilband). Endfassung (Herbst 2009). Forschungsauftrag Projektnummer 15/07 des Bundesministeriums der Finanzen," ZEW Expertises, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research, number 110522.
    3. Eliasson, Jonas, 2009. "A cost-benefit analysis of the Stockholm congestion charging system," Transportation Research Part A: Policy and Practice, Elsevier, vol. 43(4), pages 468-480, May.
    4. D K Srivastava & C Bhujanga Rao, 2010. "Reforming Indirect Taxes in India: Role of Environmental Taxes," Working Papers 2010-050, Madras School of Economics,Chennai,India.

    More about this item


    Cost–benefit; optimal taxation; marginal cost of public funds;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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