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Suppose there is a separate government program that depends on the economic behavior of the private sector and that person-specific taxes are available. To keep matters simple, assume there is a second public good H that is financed by a tax on xn. The additional government budget constraint is C(H) = WXn, where W is the tax rate and C(H) is the cost of H. One interpretation is that a separate government agency is mandated to provide H financed through a specific tax on xn. , TN) to maximize social welfare subject to the two budget constraints, taking W as given.
We can also undertake a reform analysis similar to the last section. Following the same procedure we obtain (6hmh - CG)dG = z6h(Wwh)2shww - 6hWwhshwGdG + cov(Ph, zrh)/E(Ph)- cov(Ph, mhdG)/E(Ph), where dW/D = 0, D = E(Ph), and dW = zW, z > 1. 12). The first term on the right captures the Pigou effect and is unambiguously positive. The second term captures the provision effect. And the last two terms capture the equity effects associated with the change in policy. 1 Identical Agents We will present a method for studying the level issue that is new to the literature.
However, it will generally differ from one when distorting taxes are used to finance public spending. If it is greater than one in magnitude, then the net social cost of providing the public good, (CG - N6iWixiG), is magnified relative to the first-best level. If it is less than one, then the net social cost is constricted. 3) where S = 6k6iWiskiWk d 0 is a measure of the substitution effects caused by the tax system and is non-positive by the properties of the Slutsky matrix, as pointed out by Diamond and Mirrlees.