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Open Access

Should Marginal Cost of Public Funds Include the Revenue Effect?

Swiss Journal of Economics and Statistics2011147:BF03399339

https://doi.org/10.1007/BF03399339

Published: 26 December 2011

Summary

It is an important difference in different measures of the marginal cost of public funds whether to take into account the “revenue effect” emphasized by Atkinson and Stern (1974). This paper tries to reconcile two competing measures from a general viewpoint. We demonstrate that the revenue effect represents a distortionary effect associated with commodity taxation as opposed to a “windfall.” We thus derive a new measure which captures the distortionary effect associated with commodity as opposed to lump-sum taxation. This new measure is guaranteed to be higher than unity. Moreover, this new measure lies between the two measures.

JEL-Classification

H2H4

Keywords

marginal cost of public fundsPigou effectrevenue effectRamsey taxationpublic good

Notes

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