Should excludable public goods be financed by fees or by taxes?

Research report (imported) 2004 - Max Planck Institute for Research on Collective Goods

Hellwig, Martin
What role do taxes and user fees play for public goods finance? If a public good is excludable, one can charge a user fee and exclude anybody who fails to pay the fee. If the enjoyment of the public good by an additional person entails no costs, this exclusion is inefficient. However, the inefficiency must be compared to the inefficiencies induced by other financing instruments such as income tax. Research results of the Max Planck Institute for Research on Collective Goods show that, under incomplete information about individual preferences for public goods and about labour productivity levels, an optimal incentive mechanism will make use of all available financing instruments and thereby minimize overall efficiency loss. The optimal mix of instruments satisfies a version of the “elasticities rule” of public sector pricing.

For the full text, see the German version.

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