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Optimal Fiscal Policies, Congestion and Over‐entry *
Author(s) -
Chang Juinjen,
Hung Hsiaowen,
Shieh Jhyyuan,
Lai Chingchong
Publication year - 2007
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2007.00484.x
Subject(s) - economics , inefficiency , order (exchange) , monopoly , externality , distortion (music) , optimal tax , monetary economics , public good , fiscal policy , government (linguistics) , microeconomics , finance , amplifier , linguistics , philosophy , cmos , electronic engineering , engineering
By shedding light on market imperfections and the congestion of public goods, we show that free entry in a market equilibrium will lead to excessive entry relative to the social optimum. Moreover, by specifying a generalized congestion function, it is also shown that different fiscal policies, including labor income tax, capital income tax and government expenditure, play a distinct role in terms of remedying market distortions. Specifically, optimal income taxes decrease with the degree of market imperfections in order to remove the monopoly inefficiency, while they increase with the degree of congestion in order to remedy the adverse externality caused by congestion distortion. Since a higher degree of increasing returns to an expansion in the variety of intermediate goods is found to intensify the congestion effect of government infrastructure expenditure, the optimal rule of government expenditure proposed by Barro (1990) should be modified.