Chris Jones
- Published in print:
- 2005
- Published Online:
- July 2005
- ISBN:
- 9780199281978
- eISBN:
- 9780191602535
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0199281971.003.0007
- Subject:
- Economics and Finance, Public and Welfare
In public economics applications, the MCF is frequently used to compute the cost to private surplus of raising an additional dollar of government revenue. One of the most common examples is provided ...
More
In public economics applications, the MCF is frequently used to compute the cost to private surplus of raising an additional dollar of government revenue. One of the most common examples is provided by the revision to the Samuelson condition that follows the approach recommended by Pigou (1947). The MCF is rarely used in the applied welfare literature to compute shadow prices. By doing so in this chapter, it is possible to demonstrate the separate, but related roles of the MCF and the shadow value of government revenue. While the MCF is the cost to private surplus of transferring a dollar of revenue to balance the government budget, the shadow value of government revenue is the change in social welfare from endowing another dollar of revenue on the government. Thus, the MCF is the welfare effect of transferring given resources between the private and public sectors of the economy, while the shadow value of government revenue is the welfare effect of expanding the economies’ resources. That is why the shadow value of government revenue, and not the MCF, converts efficiency gains into utility. The relationship between the MCF and the shadow value of government revenue is used to reconcile different measures of the MCF used in the public economics literature.Less
In public economics applications, the MCF is frequently used to compute the cost to private surplus of raising an additional dollar of government revenue. One of the most common examples is provided by the revision to the Samuelson condition that follows the approach recommended by Pigou (1947). The MCF is rarely used in the applied welfare literature to compute shadow prices. By doing so in this chapter, it is possible to demonstrate the separate, but related roles of the MCF and the shadow value of government revenue. While the MCF is the cost to private surplus of transferring a dollar of revenue to balance the government budget, the shadow value of government revenue is the change in social welfare from endowing another dollar of revenue on the government. Thus, the MCF is the welfare effect of transferring given resources between the private and public sectors of the economy, while the shadow value of government revenue is the welfare effect of expanding the economies’ resources. That is why the shadow value of government revenue, and not the MCF, converts efficiency gains into utility. The relationship between the MCF and the shadow value of government revenue is used to reconcile different measures of the MCF used in the public economics literature.
Chris Jones
- Published in print:
- 2005
- Published Online:
- July 2005
- ISBN:
- 9780199281978
- eISBN:
- 9780191602535
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0199281971.003.0010
- Subject:
- Economics and Finance, Public and Welfare
Government provision of a pure public good is a popular application in public economics because it combines public spending and taxation in a single project. This chapter uses shadow pricing rules ...
More
Government provision of a pure public good is a popular application in public economics because it combines public spending and taxation in a single project. This chapter uses shadow pricing rules developed in previous chapters to obtain the Samuelson (1954) condition for the optimal provision of pure public goods. The effects of distorting taxation are included by using the revised shadow prices in Ch. 6 to obtain a revised Samuelson condition, and the distributional effects are included using welfare analysis in Ch. 7. The generalized Hatta decomposition is used to show why income effects do not impact on the Samuelson condition in a single (aggregated) consumer economy. Finally, Lindahl prices are obtained for government-provided public goods when prices and incomes change endogenously in a general equilibrium setting.Less
Government provision of a pure public good is a popular application in public economics because it combines public spending and taxation in a single project. This chapter uses shadow pricing rules developed in previous chapters to obtain the Samuelson (1954) condition for the optimal provision of pure public goods. The effects of distorting taxation are included by using the revised shadow prices in Ch. 6 to obtain a revised Samuelson condition, and the distributional effects are included using welfare analysis in Ch. 7. The generalized Hatta decomposition is used to show why income effects do not impact on the Samuelson condition in a single (aggregated) consumer economy. Finally, Lindahl prices are obtained for government-provided public goods when prices and incomes change endogenously in a general equilibrium setting.
