Optimal Provision of Public Goods: A Synthesis

Claus Kreiner and Nicolaj Verdelin
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Nicolaj Verdelin: Department of Economics, University of Copenhagen

No 08-05, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: 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.

JEL-codes: H11 H23 H41 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2008-10
New Economics Papers: this item is included in nep-pbe and nep-pub
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Related works:
Working Paper: Optimal Provision of Public Goods: A Synthesis (2009)
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