Relative-Income Effects and the Appropriate Level of Public Expenditure

Yew-Kwang Ng ()

Oxford Economic Papers, 1987, vol. 39, issue 2, 293-300

Abstract: The welfare of an individual depends not only on his own income but also on his income relative to that of others. A private good that he consumes yields him (intrinsic consumption and relative-income) utilities, but also imposes external costs on others through the relative-income effects. Expenditure on public goods not only produces intrinsic consumption utilities but also indirect relative-income utilities by reducing private expenditure. Since this indirect effect is unlikely to be adequately accounted for, the "optimal" level of public expenditure estimated by the conventional SMRS 3 MRT is really suboptimal. Copyright 1987 by Royal Economic Society.

Date: 1987
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