The Marginal Cost of Public Funds
by P-O Johansson and Bengt Kriström
This title is also available as Open Access on Cambridge Core. (see link below)
In a perfectly competitive market, the cost of raising an additional euro of tax revenue is equal to one. However, when distortionary taxes—levied on goods or factors of production—are introduced, the marginal cost of public funds (MCPF) generally diverges from unity. In most cases, the MCPF exceeds one, though circumstances exist in which it may fall below one. This book introduces the concept of the MCPF, traces its historical development, and explores various applications. It focuses on economic evaluations of public sector projects that involve the provision of a pure public good. A central distinction in the literature concerns whether the government can utilize lump-sum taxation or must instead rely on modifying distortionary taxes. These may take the form of unit or proportional taxes, and are sometimes implemented not merely for revenue purposes, but to address externalities—such as taxes on greenhouse gas emissions.