Subsidies versus Public Provision of Private Goods as Instruments for Redistribution

Abstract

The literatures on differential commodity taxes and on quantity controls to supplement income taxation have developed separately. This paper combines these two strands in the standard framework of optimal non‐linear income taxation. We use a model with two types of households where the government has access to both subsidy policy and public provision of a good substitutable for leisure, and ouseholds can supplement the publicity provided good from the market. We present conditions under which policy should involve one or both of these two instruments alongside income taxation. The model is extended to many ability types.