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Title: Public goods, congestion, and fiscal policy: Do consumption-based instruments matter?
Authors: Chatterjee, S
Ghosh, S
Keywords: Public Goods
Consumption-based scal instru-ments
Publication Date: 2009
Publisher: Brunel University
Citation: Economics and Finance Working papers, Brunel University, 09-07.
Abstract: We examine the impact of scal policy on macroeconomic performance when public goods play a dual role by simultaneously providing both productive and utility services to the private sector. When these services are subject to congestion, a consumption tax is distortionary, generating a dynamic adjustment that contrasts an income tax. The design of optimal scal policy demonstrates the possibilities for using both income- and consumption-based scal instruments as opposed to relying on the income tax alone. In correcting for congestion, an income tax-consumption subsidy combination is the preferred policy when factor-substitutability in production is limited. On the other hand, an increase in the elasticity of substitution in production raises the e cacy of a consumption tax as an alternative to the income tax. Not internalizing the dual bene ts of public goods might lead to misleading predictions regarding the e ect of public policies on welfare.
Appears in Collections:Economics and Finance
Dept of Economics and Finance Research Papers

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