EconPapers    
Economics at your fingertips  
 

The Social Marginal Cost Curve and a Corner Solution of the Second-best Level of Public Good Provision: A Review and an Extension

Ming Chung Chang, Hsiao-Ping Peng and Yan-Ching Ho

Swiss Journal of Economics and Statistics (SJES), 2016, vol. 152, issue III, 209-241

Abstract: Assume that the private goods and the public good are weakly separable, the private goods are gross complements, and the private utility function is a homogeneous of degree one function with constant elasticity of substitution. We demonstrate that, under commodity taxation, the social marginal cost curve of public good provision is initially upward sloping and eventually becomes downward sloping. Moreover, the social marginal cost eventually falls below the private marginal cost. These unusual properties arise from a demand-shift effect: An increase in the tax rate raises the marginal willingness to pay for the public good since it pushes up the unit cost of private utility, hence making the public good more attractive than private goods. In other words, the supply of the public good creates its own demand when the funding to cover production costs is raised through distortionary commodity taxes. It follows that there may exist three solutions to the first-order condition for the second-best problem: two of them are interior solutions and one is a corner solution.

Keywords: second-best public good provision; social marginal cost; demand-shift effect; weak Laffer effect (search for similar items in EconPapers)
JEL-codes: H21 H41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.sjes.ch/papers/2016-III-2.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ses:arsjes:2016-iii-2

Access Statistics for this article

Swiss Journal of Economics and Statistics (SJES) is currently edited by Rafael Lalive

More articles in Swiss Journal of Economics and Statistics (SJES) from Swiss Society of Economics and Statistics (SSES) Contact information at EDIRC.
Bibliographic data for series maintained by Peter Steiner ().

 
Page updated 2018-06-07
Handle: RePEc:ses:arsjes:2016-iii-2