Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/186061 
Year of Publication: 
2016
Citation: 
[Journal:] Swiss Journal of Economics and Statistics [ISSN:] 2235-6282 [Volume:] 152 [Issue:] 3 [Publisher:] Springer [Place:] Heidelberg [Year:] 2016 [Pages:] 209-241
Publisher: 
Springer, Heidelberg
Abstract: 
Assume that the private goods and the public good are weakly separable, the private goods are gross complements, and the private utility function is a homogeneous of degree one function with constant elasticity of substitution. We demonstrate that, under commodity taxation, the social marginal cost curve of public good provision is initially upward sloping and eventually becomes downward sloping. Moreover, the social marginal cost eventually falls below the private marginal cost. These unusual properties arise from a demand-shift effect: An increase in the tax rate raises the marginal willingness to pay for the public good since it pushes up the unit cost of private utility, hence making the public good more attractive than private goods. In other words, the supply of the public good creates its own demand when the funding to cover production costs is raised through distortionary commodity taxes. It follows that there may exist three solutions to the first-order condition for the second-best problem: two of them are interior solutions and one is a corner solution.
Subjects: 
second-best public good provision
social marginal cost
demand-shift effect
weak Laffer effect
JEL: 
H21
H41
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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