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Optimal Provision of Public Goods: A Synthesis

  • Claus Thustrup Kreiner

    (Department of Economics, University of Copenhagen)

  • Nicolaj Verdelin

    (Department of Economics, University of Copenhagen)

There currently exist two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxation and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demonstrating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of a public good without imposing any separability assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are completely different and the traditional formula with its emphasis on MCF only obtains in a very special case.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 08-05.

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Length: 18 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:kud:epruwp:08-05
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