An Allocative Efficiency Rationale for a Universal Basic Income

This paper shows that allocative efficiency may entail high income tax revenues and a basic income. We consider an economy where people consume three types of goods: market goods, public goods, and social goods. The latter are non-priced goods with positive externalities that are produced by citizens in their leisure time. We show that in the absence of income taxes, work hours are too high and social-goods production is too low as compared to the socially optimal levels. We characterize optimal income taxation and develop a set of testable predictions. One implication of the model is that, as wages grow over time, at some point a basic income becomes part of the optimal policy under economically plausible conditions.