Two Approaches to Determine Public Good Provision under Distortionary Taxation

The paper argues that the appropriate approach to determine public good provision financed by distortionary taxes should depend on the available tax regime. If a sufficiently rich tax regime exists, one could rely on the Pareto criterion, which would be less information–demanding than a social welfare approach requiring access to social welfare weights assigned to various groups. The discussion is related to a number of representative tax regimes and cost–benefit approaches in the literature. It is also argued that, whatever the available tax regime, cost–benefit analysis runs into problems unless one can assume that taxes are set optimally.