The MCPF under the pandemic

Shigeo Morita

Journal of Public Economic Theory, 2022, vol. 24, issue 5, 993-1015

Abstract: This study examines the marginal cost of public funds (MCPF) to assess the optimality of preventive governmental expenditure based on the optimal nonlinear income taxation with preventive behaviors by both individuals and the government. We show that the optimal condition with respect to preventive government expenditure consists of two parts. One part reflects how the trade‐off between preventive expenditure and consumption should deviate from the laissez faire for high‐skilled and low‐skilled individuals, which is interpreted as the Pigou effect. The other part measures how mimickers benefit from preventive government expenditure, which is called the genetic effect. Whether the MCPF is greater than 1 or not depends on the relative magnitude of the Pigou effect and the genetic effect. Moreover, we examine the MCPF if the government cannot commit to a certain policy and if the types of individuals are completely separated and show that the Pigou effect should be modified.

Date: 2022
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