Optimal Taxation and Provision of Public Goods in a Unionized Economy

This paper concerns optimal factor income taxation and provision of a public good in a small open economy, which is characterized by union wage setting. The analysis is based on a general equilibrium model, where the hours of work are endogenous, and the tax instruments are linear taxes on labor income and capital income. The purpose of the paper is to characterize the conditions for optimal taxation and provision of a public good under excess supply of labor, and then compare the results with those arising when the labor market is competitive.