Can Fiscal Externalities Be Internalized?

Erzo Luttmer

No 30213, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Subsidies and in-kind transfers give rise to negative fiscal externalities. However, internalizing negative fiscal externalities through taxation would undo the subsidy or in-kind transfer that caused them. Similarly, positive fiscal externalities cannot be internalized though government subsidies. This paper describes a mechanism that transfers fiscal externalities from the government to private parties. Such transfers generate incentives within the private sector to reduce inefficiencies caused by fiscal externalities. Thus, the paper offers a straightforward, but powerful, insight: transferring fiscal externalities to third parties extends the reach of the Coase Theorem to inefficiencies stemming from fiscal externalities.

JEL-codes: D02 H10 H23 O35 (search for similar items in EconPapers)
Date: 2022-07
Note: PE
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