General Production Rules in a Second-Best Environment
Abstract
This chapter concludes our survey of second-best public expenditure theory by exploring some fairly general propositions about government production in an environment made second best because of distorting taxation. A major goal of the chapter is to integrate our previous results on second-best tax theory with second-best public expenditure theory. The chapter presents the Diamond/Mirrlees result that production should be efficient under optimal taxation and Boadway’s analysis of the optimal government production rules under non-optimal distorting taxation. Boadway’s analysis incorporates both efficiency and equity considerations in the design of the optimal production rules. ...
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