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HOW SHOULD THE GOVERNMENT ALLOCATE ITS TAX REVENUES BETWEEN PRODUCTIVITY-ENHANCING AND UTILITY-ENHANCING PUBLIC GOODS?

Published online by Cambridge University Press:  22 March 2010

George Economides ,
Hyun Park  and
Apostolis Philippopoulos
George Economides
Affiliation:
Athens University of Economics and Business
Hyun Park
Affiliation:
Kyung Hee University
Apostolis Philippopoulos*
Affiliation:
Athens University of Economics and Business University of Glasgow and CESifo
*
Address correspondence to: Apostolis Philippopoulos, Department of Economics, Athens University of Economics and Business, 76 Patission Street, Athens 10434, Greece; e-mail: aphil@aueb.gr.
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Abstract

We present a fairly standard general equilibrium model of endogenous growth with productive and nonproductive public goods and services. The former enhance private productivity and the latter private utility. We study Ramsey second-best optimal policy, where the latter is summarized by the paths of the income tax rate and the allocation of collected tax revenues between productivity-enhancing and utility-enhancing public expenditures. We show that the properties and macroeconomic implications of the second-best optimal policy (a) are different from the benchmark case of the social planner's first-best allocation and (b) depend crucially on whether public goods and services are subject to congestion.

Keywords

Second-Best Optimal PolicyCongested Public GoodsGrowth
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 3 , June 2011 , pp. 336 - 364
Copyright
Copyright © Cambridge University Press 2010

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