Public Finance in a Nutshell: A Cobb Douglas Teaching Tool for General Equilibrium Tax Incidence and Excess Burden

19 Pages Posted: 2 Feb 2017

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Chi Ta

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: December 2016

Abstract

To help first- or second-year graduate students in economics apply their theoretical training, this paper shows how to solve a simple and intuitive computable general equilibrium (CGE) model using a calculator. Because this simplified Harberger model uses Cobb Douglas functional forms for utility and production, one can solve for all input and output prices and quantities with no taxes and then solve for exact measures of output with a large tax change (not using derivatives). We then show how to solve simultaneously for capital and labor prices (incidence on the sources side of income), for both output prices (incidence on the uses side), for exact measures of overall welfare loss such as the equivalent variation, for excess burden and marginal excess burden, and for the effects on revenue in the form of a Laffer Curve.

Keywords: computable general equilibrium, economic efficiency, distribution of burdens, sources side, uses side, equivalent variation

JEL Classification: A200, C630, C680, D040, D580, H210, H220, H230, H240, H250

Suggested Citation

Fullerton, Don and Ta, Chi, Public Finance in a Nutshell: A Cobb Douglas Teaching Tool for General Equilibrium Tax Incidence and Excess Burden (December 2016). CESifo Working Paper Series No. 6265. Available at SSRN: https://ssrn.com/abstract=2910261

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Chi Ta

University of Illinois at Urbana-Champaign ( email )

1408 W. Gregory Dr.
Urbana, IL 61801
United States

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