Optimal Provision of Public Goods: A Synthesis

25 Pages Posted: 16 May 2012

See all articles by Claus Thustrup Kreiner

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics

Nicolaj Verdelin

University of Copenhagen

Date Written: June 2012

Abstract

The standard approach to the optimal provision of public goods highlights the importance of distortionary taxation and distributional concerns. A new approach neutralizes distributional concerns by adjusting the income tax schedule. We demonstrate that both approaches are derived from the same basic formula. We also take the new approach further by deriving an intuitive formula for the optimal level of public goods, without imposing strong assumptions on preferences. This formula shows that distortionary taxation has a role to play, as in the standard approach. However, the main determinants of optimal provision are different, and the modified Samuelson rule is likely to lead to underprovision.

Keywords: Cost–benefit analysis, marginal cost of public funds, public‐good provision

JEL Classification: H11, H23, H41

Suggested Citation

Kreiner, Claus Thustrup and Verdelin, Nicolaj, Optimal Provision of Public Goods: A Synthesis (June 2012). The Scandinavian Journal of Economics, Vol. 114, Issue 2, pp. 384-408, 2012. Available at SSRN: https://ssrn.com/abstract=2060769 or http://dx.doi.org/10.1111/j.1467-9442.2011.01686.x

Claus Thustrup Kreiner (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Nicolaj Verdelin

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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