Optimal Public Good Provision with Limited Lump-Sum Taxation

Abstract

It is often argued that the use of distortionary taxation lowers the optimal provision of public goods below its optimal level in a first-best economy, which contains no restrictions on lump-sum taxation. However, this issue is usually investigated using commodity-tax models that contain no lump-sum taxes. This paper examines a many-consumer economy in which the only tax instruments are commodity taxes and a poll tax (subsidies are negative taxes). The optimal level of public good provision in this economy typically exceeds the first-best level, at least for distributionally neutral public goods. Copyright 1991 by American Economic Association.