The Dual Nature of Public Goods and Congestion: The Role of Fiscal Policy Revisited
35 Pages Posted: 17 Sep 2006 Last revised: 7 Mar 2011
Date Written: March 4, 2011
Abstract
The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption-based instruments in conjunction with the income tax. An income tax-financed increase in government spending dominates both lumpsum and consumption tax-financing. Replacing the lumpsum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.
Keywords: Public Goods, Congestion, Consumption-based fiscal instruments, Growth, Welfare
JEL Classification: E21, E62, H21, H41, H54
Suggested Citation: Suggested Citation
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