The Dual Nature of Public Goods and Congestion: The Role of Fiscal Policy Revisited
University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics
Cardiff University - Cardiff Business School - Economics Section
March 4, 2011
The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption-based instruments in conjunction with the income tax. An income tax-financed increase in government spending dominates both lumpsum and consumption tax-financing. Replacing the lumpsum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.
Number of Pages in PDF File: 35
Keywords: Public Goods, Congestion, Consumption-based fiscal instruments, Growth, Welfare
JEL Classification: E21, E62, H21, H41, H54working papers series
Date posted: September 17, 2006 ; Last revised: March 7, 2011
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