The Marginal Cost of Public Funds

Per-Olov Johansson (Stockholm School of Economics), Bengt Kriström (SLU-Umeå)

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English

Cambridge University Press
29 May 2025

Labour economics; Public finance; Taxation & duties law

Series: Elements in Public Economics

In a perfect market economy, the cost of raising another euro of tax revenue equals one. However, once distortionary taxes on goods and factors are introduced, the marginal cost of public funds, MCPF, typically deviates from one. Often it exceeds one, but one can also find cases where it falls short of one. This Element introduces the concept of the MCPF, sketches its history, and discusses a number of applications. It does this by undertaking economic evaluations of public sector projects involving a pure public good. An important distinction in the literature relates to where the government has access to lump-sum taxation versus where it must rely on changing a distortionary tax. These are often unit taxes or proportional taxes. Sometimes they are even introduced to alleviate a problem. An example is a tax on emissions of greenhouse gases. This title is also available as Open Access on Cambridge Core.

By: Per-Olov Johansson (Stockholm School of Economics), Bengt Kriström (SLU-Umeå)
Imprint: Cambridge University Press
Country of Publication: United Kingdom
Weight: 144g
ISBN: 9781009620482
ISBN 10: 1009620487
Series: Elements in Public Economics
Pages: 88
Publication Date: 29 May 2025
Audience: General/trade , ELT Advanced
Format: Paperback
Publisher's Status: Active

1. Introduction; 2. Notes on the history of the MCPF; 3. The MCPF under lump-sum taxation; 4. Ramsey taxation; 5. A Smörgåsbord of further topics in variations of the basic model; 6. Extension to a world with many goods and factors and to an intertemporal world; 7. Optimal and non-optimal income distributions; 8. A few reflections on empirical approaches; Appendix A. The basic utility maximization problem; Appendix B. A numerical and graphical illustration of the MCPF vs. MEB; Appendix C. A tax on emissions; Appendix D. A private-sector project; Appendix E. Endogenous wage rate; Appendix F. A general equilibrium MCPF; Appendix G. A simple intertemporal extension; References.