The Profitable Theory of User Cost and Public Finance
26 Pages Posted: 7 Oct 2008
Date Written: October 7, 2008
Abstract
Dale W. Jorgenson's user cost is a concept widely applied, especially, in public finance, but such applications seem incomplete when there is no supply curve. His model also requires knowledge of future incomes, without which there is not even a demand for capital. This paper detects a mathematical error of the Jorgenson model, and derives an investment criterion that does not recourse to future incomes. Such criterion helps develop a strictly Walrasian general equilibrium q-theory of investment. With this model, this paper then derives an extended Coase Theorem on taxation, shows the butterfly effects of tax policy, streamlines the entanglement among various tax policies, including those aimed at solving the double taxation problem, and confirms that optimal taxation is essentially a random walk. It also shows how the Solow equation is wrong, and that capital formation must be determined by demand and supply.
Keywords: User cost, public finance, bilateral trade, gain from trade, Walras' law, Central Limit Theorem, Coase Theorem, butterfly effects, double taxation, capital formation, optimal tax policy, opportunity income
JEL Classification: D24, E60
Suggested Citation: Suggested Citation
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