Chapter 10

The First-Best Theory of Taxation and Transfers

Abstract

Having covered the mainstream normative theory of public expenditures in Chapter 2 through 9, the mainstream first-best theory of taxation is easy to describe. We saw that first-best public expenditure theory addresses two fundamental questions: in what area of economic activity can the government legitimately become involved and what decision rules should the government follow in each area? Chapter 10 explores the public choice perspective on distribution that argues there is no need for a social welfare function to resolve the distribution question. Instead, public assistance is seen as an extension of private charity, which results from a consumer externality. Hence, public assistance ...

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