Public goods and Pigouvian taxes

Abstract

This paper consists of the text of two articles prepared for the second edition of the New Palgrave Dictionary of Economics. The first article provides a mathematical and diagrammatic exposition of the theory of public goods as originally formulated by Samuelson. It describes the extension of the model to take account of the costs of distortionary taxation, and discusses the concept of the marginal cost of public funds. Different types of public goods (such as mixed goods and local and global public goods) are discussed before turning to a survey of the incentive problems related to preference revelation. The second article considers the use of taxes designed to correct for negative external effects. It sets out the basic theoretical argument and considers the modifications that have to be made when these taxes are seen in the context of an otherwise distortionary tax system. It also briefly considers the issue of the ‘double dividend’ from a green tax reform.