A simulation on the public good provision under various taxation systems

Abstract

This paper integrates two traditions in taxing theory by constructing a primitive general equilibrium (GE) model which incorporates a public good, and examine the desirability of taxing system to sustain its optimum level. Formally, we start with utilizing the Lindahl mechanism to compute a Pareto-optimal public good level under a specification of the parameters on production and utility function, with k the substitution parameter on the latter. The burden-sharing in this Lindahl mechanism is called the Lindahl tax. We compute the rates of various taxes in order to sustain the optimal public good level, and compare the Gini coefficients and the social welfares. It is shown for a specified case that when 0 <0, the same simulation shows that the Lindahl tax is more desirable than the income tax (and proportional commodity tax) from the two viewpoints. Finally, it is shown that when 0 <0 is locally unstable. Thus, this paper concludes that the income tax (and the proportional commodity tax) tends to be superior to the Lindahl tax in order to provide public good. © 2014 Published by Elsevier B.V.