Excess burden and the cost of inefficiency in public services provision

Arbeitspapier

In this paper we revisit the literature on the economic consequences from inefficiency in public services provision. Following Dupuit (1844) and Pigou (1947) we argue that it is important to take the financing side explicitly into account. The fact that public expenditure financing must rely on distortional taxation implies that both direct and indirect costs are relevant when estimating the economic impacts of inefficiency in public services provision. Using Hicks’ compensating variation (following Diamond and McFadden (1974) and Auerbach (1985)) we show that these magnification mechanisms are not only conceptually relevant, they are also important from a quantitative point of view. Specifically, we rely on a range of estimates of public sector efficiency (from Afonso, Schuknecht and Tanzi (2005, 2006)) to illustrate numerically that the relative importance of indirect costs of public sector provision inefficiency, linked to financing through distortional taxation increases with the magnitude of the inefficiency.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 601

Classification and Topics

• Classification: Wirtschaft ; Consumer Economics: Theory ; Fiscal Policy ; Taxation and Subsidies: Efficiency; Optimal Taxation ; National Government Expenditures and Related Policies: General
• Subject: excess burden ; Government efficiency ; spending ; taxes ; Öffentlicher Sektor ; Allokationseffizienz ; Excess Burden ; Öffentliche Ausgaben ; Theorie ; Welt

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Afonso, António ; Gaspar, Vítor
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/153035
• Last update: 10.03.2025, 11:43 AM CET