Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/192378 
Year of Publication: 
2004
Series/Report no.: 
Discussion Papers No. 396
Publisher: 
Statistics Norway, Research Department, Oslo
Abstract: 
We use a CGE model to estimate the social cost of a marginal increase in public expenditure in Norway. Norway exemplifies an economy with high taxes. Distortionary taxes imply wedges between the market prices and the corresponding shadow prices. The shadow prices are unobservable, which is the rationale for using a CGE model to estimate the social cost of government consumption. The social cost is decomposed into a direct resource cost and the cost of public funds. The CGE estimate of the direct resource cost is implicitly a weighted average of different opportunity costs, reflecting distortions in the Norwegian economy. Our estimate of the resource cost equals about ¾ of the ex ante market price of the resources consumed. This gap is due to a positive labour supply response combined with a high effective tax rate on labour income. Our estimate of the social cost of raising public funds through a higher pay-roll tax is about 20 percent of the direct resource cost.
Subjects: 
Tax distortions
Cost-benefit analysis
Cost of public funds
Computable general equilibrium models
JEL: 
H20
H21
H43
J22
Document Type: 
Working Paper

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