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Applied Welfare Economics$
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Chris Jones

Print publication date: 2005

Print ISBN-13: 9780199281978

Published to Oxford Scholarship Online: July 2005

DOI: 10.1093/0199281971.001.0001

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The Marginal Social Cost of Public Funds

The Marginal Social Cost of Public Funds

Chapter:
(p.156) 7 The Marginal Social Cost of Public Funds
Source:
Applied Welfare Economics
Author(s):

Chris Jones (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0199281971.003.0007

In public economics applications, the MCF is frequently used to compute the cost to private surplus of raising an additional dollar of government revenue. One of the most common examples is provided by the revision to the Samuelson condition that follows the approach recommended by Pigou (1947). The MCF is rarely used in the applied welfare literature to compute shadow prices. By doing so in this chapter, it is possible to demonstrate the separate, but related roles of the MCF and the shadow value of government revenue. While the MCF is the cost to private surplus of transferring a dollar of revenue to balance the government budget, the shadow value of government revenue is the change in social welfare from endowing another dollar of revenue on the government. Thus, the MCF is the welfare effect of transferring given resources between the private and public sectors of the economy, while the shadow value of government revenue is the welfare effect of expanding the economies’ resources. That is why the shadow value of government revenue, and not the MCF, converts efficiency gains into utility. The relationship between the MCF and the shadow value of government revenue is used to reconcile different measures of the MCF used in the public economics literature.

Keywords:   distributional effects and the MCF, marginal social cost of public funds (MCF), modified MCF, revised shadow prices and the MCF, shadow value of government revenue

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