Financing Public Goods

Abstract

Public goods can be financed by direct taxation or a subsidy to private spending. This paper examines the relative efficiency and distributional consequences of the two methods. Efficiency is shown to depend on the price elasticity of private spending and the trade- off between public and private spending. When this trade-off is dollar for dollar, however, a subsidy is always more efficient than direct taxation. The gains from a subsidy are larger for a mixed good than for a pure public good. Looking a t distributional effects, the author shows when richer taxpayers may prefer a tax credit to deductibility, even though they face lower prices with deductibility, and also shows when richer taxpayers prefer direct taxation to either type of subsidy. Copyright 1987 by University of Chicago Press.