Swiss Journal of Economics and Statistics

, Volume 147, Issue 1, pp 1–16 | Cite as

Should Marginal Cost of Public Funds Include the Revenue Effect?

  • Ming Chung Chang
  • Shufen Wu
Open Access


It is an important difference in different measures of the marginal cost of public funds whether to take into account the “revenue effect” emphasized by Atkinson and Stern (1974). This paper tries to reconcile two competing measures from a general viewpoint. We demonstrate that the revenue effect represents a distortionary effect associated with commodity taxation as opposed to a “windfall.” We thus derive a new measure which captures the distortionary effect associated with commodity as opposed to lump-sum taxation. This new measure is guaranteed to be higher than unity. Moreover, this new measure lies between the two measures.


H2 H4 


marginal cost of public funds Pigou effect revenue effect Ramsey taxation public good 


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Copyright information

© Swiss Society of Economics and Statistics 2011

Authors and Affiliations

  1. 1.The Graduate Institute of Industrial EconomicsNational Central UniversityChung-Li CityTaiwan
  2. 2.The Graduate Institute of Industrial EconomicsNational Central UniversityTaiwan

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