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Evaluating Public Expenditures: Does It Matter How They are Financed?

Author

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  • Richard M. Bird

    () (International Tax Program, Business Economics, Rotman School of Management, University of Toronto)

Abstract

This paper reviews the relationship, or lack of it, between two bodies of literature dealing, respectively, with cost-benefit analysis and the marginal cost of public funds (MCF). It argues that, while there are no simple answers to the question of how, or to what extent, different methods of financing public expenditures should enter formally into the analysis of particular public expenditure decisions, the question is nonetheless important. When the financing of a project can firmly be linked to certain types of finance with low or no distortionary effects, it is inappropriate to apply a correction for the shadow price of fiscal resources (MCF). On the other hand, except in such cases as a practical matter an MCF correction of (say) 20 percent or so at the least does no harm and may be useful. The principal conclusion emerging from this review, however, is that far more attention needs to be paid in general not only to links between financing and spending decisions but also, more importantly, to ensuring that the process by which spending decisions are made is structured to ensure that those who make the decisions are as fully informed as possible and, equally important, that those who are affected by the decisions are also made as aware as possible of all the relevant consequences, both on the spending and financing sides of the decision.

Suggested Citation

  • Richard M. Bird, 2005. "Evaluating Public Expenditures: Does It Matter How They are Financed?," International Tax Program Papers 0506, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  • Handle: RePEc:ttp:itpwps:0506
    as

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    File URL: http://www-2.rotman.utoronto.ca/iib/ITP0506.pdf
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    References listed on IDEAS

    as
    1. Bird, Richard M., 1993. "Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralization," National Tax Journal, National Tax Association, vol. 46(2), pages 207-27, June.
    2. Steven Renzetti, 1999. "Municipal Water Supply and Sewage Treatment: Costs, Prices and Distortions," Canadian Journal of Economics, Canadian Economics Association, vol. 32(3), pages 688-704, May.
    3. Ng, Yew-Kwang, 1987. "Diamonds Are a Government's Best Friend: Burden-Free Taxes on Goods Valued for Their Values," American Economic Review, American Economic Association, vol. 77(1), pages 186-191, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Richard M. Bird, 2008. "Tax Challenges Facing Developing Countries," Working Papers id:1618, eSocialSciences.
    2. Majah-Leah Ravago & James Roumasset, 2016. "The Public Economics of Electricity Policy with Philippine Applications," Working Papers 201613, University of Hawaii at Manoa, Department of Economics.
    3. Stijn Kelchtermans & Frank Verboven, 2010. "Participation and study decisions in a public system of higher education," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(3), pages 355-391.
    4. Yeti Nisha Madhoo & Shyam Nath, 2010. "Beneficiary Charges: The Cinderella of Subnational Finance," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1317, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

    More about this item

    Keywords

    benefit-cost analysis; marginal cost of public funds; Wicksellian connection;

    JEL classification:

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

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