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Public Provision of Private Goods, Tagging and Optimal Income Taxation with Heterogeneity in Needs

ECONPUBBLICA Working Paper No. 153

48 Pages Posted: 4 Mar 2012  

Spencer Bastani

Linnaeus University - Department of Economics and Statistics

Soren Blomquist

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Luca Micheletto

Bocconi University

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Date Written: November 2010

Abstract

Previous literature has shown that public provision of private goods can be a welfare-enhancing device in second-best settings where governments pursue redistributive goals.

However, three issues have so far been neglected. First, the case for supplementing an optimal nonlinear income tax with public provision of private goods has been made in models where agents di er only in terms of market ability. Second, the magnitude of the welfare gains achievable through public provision schemes has not been assessed. Third, the similarities/differences between public provision schemes and tagging schemes have not been thoroughly analyzed. Our purpose in this paper is therefore threefold: first, to extend previous contributions by incorporating in the theoretical analysis both heterogeneity in market ability and in the need for the publicly provided good; second, to perform numerical simulations to quantify the size of the potential welfare gains achievable by introducing a public provision scheme, and to characterize the conditions under which these welfare gains are sizeable; finally, to compare the welfare gains from publicprovision with the welfare gains from tagging.

Keywords: optimal income taxation, in-kind transfers, tagging

JEL Classification: H21, H42

Suggested Citation

Bastani, Spencer and Blomquist, Soren and Micheletto, Luca, Public Provision of Private Goods, Tagging and Optimal Income Taxation with Heterogeneity in Needs (November 2010). ECONPUBBLICA Working Paper No. 153. Available at SSRN: https://ssrn.com/abstract=2014637 or http://dx.doi.org/10.2139/ssrn.2014637

Spencer Bastani (Contact Author)

Linnaeus University - Department of Economics and Statistics ( email )

Växjö, S-35195
Sweden

Soren Blomquist

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 18 471 1102 (Phone)
+46 18 471 1478 (Fax)

Luca Micheletto

Bocconi University ( email )

Via Sarfatti 25
20136 Milan, MI 20136
Italy

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