Optimal Provision of Public Goods: A Synthesis

Claus Thustrup Kreiner and Nicolaj Verdelin

Scandinavian Journal of Economics, 2012, vol. 114, issue 2, 384-408

Abstract: The standard approach to the optimal provision of public goods highlights the importance of distortionary taxation and distributional concerns. A new approach neutralizes distributional concerns by adjusting the income tax schedule. We demonstrate that both approaches are derived from the same basic formula. We also take the new approach further by deriving an intuitive formula for the optimal level of public goods, without imposing strong assumptions on preferences. This formula shows that distortionary taxation has a role to play, as in the standard approach. However, the main determinants of optimal provision are different, and the modified Samuelson rule is likely to lead to underprovision.

Date: 2012
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