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Growth, Externalities and Taxation

David M Newbery ()

Scottish Journal of Political Economy, 1990, vol. 37, issue 4, 305-26

Abstract: The "new growth theory" emphasizes externalities, which cause market prices to exceed the efficient price. If imperfect competition results, distortions will be compounded. A central insight of public finance is that distortion costs rise as the square of the distortion, so compounding distortions greatly increases their costs. Distortions cannot be considered in isolation, as their combined effect is greater than the sum of each separately. Taxes on goods whose market price is thus distorted may, therefore, be substantially more costly than simple market-priced-based calculations may suggest. This paper explores a variety of such compounded distortions. Copyright 1990 by Scottish Economic Society.

Date: 1990
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Handle: RePEc:bla:scotjp:v:37:y:1990:i:4:p:305-26