Public Finance, 3rd Edition

Important Modifications of the Harberger Model

The basic Harberger model makes a number of very strong assumptions that need to be modified to extend the usefulness of the model. Three especially useful modifications are variable rather than fixed factor supplies, imperfect rather than perfect competition, and heterogeneous rather than homogenous consumers. We conclude the chapter with brief discussions of each of them.

Variable Factor Supplies

The assumption of fixed factor supplies simplifies an already complex analytical model, but it needs to be modified for the sake of reality. Factor supplies are certainly variable in the long run, with the single possible exception of land, and the supply responses to a tax matter in determining the incidence ...