Public Goods, Distribution, and Optimal Taxation

Abstract

The importance of distributional aspects of environmental policy has become even more evident over time. This paper deals with how to handle distributional aspects of public good provision optimally from a social welfare point of view, when distributional issues can also be handled through optimal non-linear income taxes. The analysis is based on a perturbation, or sufficient statistics, approach and we demonstrate that an optimally modified Samuelson rule, for the provision of public goods, can often be expressed in terms of a few estimable elasticities. In particular, we show the crucial role of the difference between the cross-sectional and individual income elasticity of the marginal willingness to pay for the public good.