Measuring the Welfare Impact of Fiscal Policy

This paper is a guide to welfare cost measurement with all the basic elements of fiscal policy active in a representative consumer economy. By developing a simple dual framework which nevertheless is more general than the special cases usually employed, we are able to clear up several confusions in the literature on the welfare cost of tax changes. We argue for the natural dominance of a single measure of welfare cost. We do a similar analysis of the parallel literature on government project evaluation, and are able to clear up the confusing concept of the marginal social cost of funds.