Some Consequences of Governmental Provision of Rival Goods

Much of the work in public finance assumes that taxes either pay for pure public goods or finance redistribution. Under this assumption, optimal taxation would be of the lump-sum variety, and the evaluation of actual tax systems becomes an exercise in determining the extent to which the requirement of using inferior tax instruments, together with other constraints, creates deadweight loss. In practice, however, many goods commonly funded with general tax revenues are rival in nature and, to that extent, mimic market-supplied goods in terms of the costs that their provision imposes and the benefits that their provision bestows. For such goods, lump-sum taxation is not an ideal.This paper explores some of the tax ramifications of government provision of rival goods. It also examines second-best problems arising in the transition from funding for such goods through generally-applicable taxes such as income taxes to taxes that better internalize the costs of supplying the goods