Optimal Income Taxation, Public-Goods Provision and Public-Sector Pricing: A Contribution to the Foundations of Public Economics

Abstract

The paper develops an integrated model of optimal nonlinear income taxation, public-goods provision and pricing in a large economy with private information about labour productivities and public-goods preferences and with binding participation constraints and/or distributive concerns. With binding participation constraints, it is desirable to use nonlinear income taxes as well as admission fees for public-goods …nance. With (su¢ ciently large) inequality aversion, it is desirable to use admission fees as well as income taxes for redistribution. In either case, optimal income taxes and admission fees on excludable public goods satisfy a version of the Mirrlees and Ramsey-Boiteux tax formulae. A renegotiation proofness condition on the consumption side of the allocation is used to write the incentive constraints for the multidimensional hidden characteristics as multiple unidimensional constraints.

The provision and pricing of excludable public goods: Ramsey–Boiteux pricing versus bundling

“…Given these considerations, I refer to an allocation as third-best if and only if it maximizes the aggregate surplus (2.8) over the set of all feasible, incentive-compatible, individually rational, and renegotiation proof allocations. 17 To de…ne renegotiation proofness formally, I say that a net-trade allocation for private-good consumption and public-good admission tickets is an array (z c ( ; ); z 1 ( ; ); :::; z m ( ; )) such that for each ( ; ! ); z c ( ; !)…”

“…In this case, (2.16) is incompatible with the requirement that the social marginal utility of private-good consumption be equalized across agents. See Hellwig (2005Hellwig ( , 2004. 1 1 This speci…cation encompasses the requirement that nobody should have an incentive to reject the proposed allocation in order to consume his own output Y and at the same time to enjoy the public goods provided by others?…”

Separability and public finance

“…The production efficiency lemma of Diamond and Mirrlees (1971) states conditions under which the nonsatiation property is satisfied in an economy with linear taxation. This property is also valid with non-linear taxation in the Mirrlees (1971) setup, under the single-crossing condition (Hellwig (2007)). It seems plausible that second best optima are locally non-satiated in fairly general circumstances, for instance in the absence of single-crossing under multidimensional heterogeneity.…”

“…It is possible to have more heterogeneity in tastes for public good, as in Hellwig (2008b). Indeed, when preferences take the form u(φ(c), ) + ψ(g, ζ), the incentive constraints are independent of the heterogeneity ζ.…”

“…In a different vein, Bovenberg and Jacobs (2005) present a set of assumptions under which education, as an intermediary input, should be tax-free. In Cremer, Gahvari, and Ladoux (1998) Pigovian taxes are the appropriate way to handle externalities, while a version of the Samuelson rule applies in Boadway and Keen (1993), Guesnerie (1995), Nava, Schroyen, and Marchand (1996) and Hellwig (2008b).…”