IDEAS home Printed from https://ideas.repec.org/p/ise/isegwp/wp52006.html
   My bibliography  Save this paper

Excess burden and the cost of inefficiency in public services provision

Author

Listed:
  • António Afonso
  • Vítor Gaspar

Abstract

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.

Suggested Citation

  • António Afonso & Vítor Gaspar, 2006. "Excess burden and the cost of inefficiency in public services provision," Working Papers Department of Economics 2006/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    • Handle: RePEc:ise:isegwp:wp52006
    as

    Download full text from publisher

    File URL: https://depeco.iseg.ulisboa.pt/wp/wp052006.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. J. E. Stiglitz & P. Dasgupta, 1971. "Differential Taxation, Public Goods, and Economic Efficiency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 151-174.
    2. Afonso, Antonio & St. Aubyn, Miguel, 2005. "Non-Parametric Approaches to Education and Health Efficiency in OECD Countries," Journal of Applied Economics, Universidad del CEMA, vol. 8(2), pages 1-20, November.
    3. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 28(Jul), pages 2-13.
    4. Afonso, Antonio & St. Aubyn, Miguel, 2006. "Cross-country efficiency of secondary education provision: A semi-parametric analysis with non-discretionary inputs," Economic Modelling, Elsevier, vol. 23(3), pages 476-491, May.
    5. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 119-128.
    6. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
    7. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127, Elsevier.
    8. Antonio Afonso & Ludger Schuknecht & Vito Tanzi, 2010. "Public sector efficiency: evidence for new EU member states and emerging markets," Applied Economics, Taylor & Francis Journals, vol. 42(17), pages 2147-2164.
    9. Tanzi,Vito & Schuknecht,Ludger, 2000. "Public Spending in the 20th Century," Cambridge Books, Cambridge University Press, number 9780521662918, January.
    10. R. C. Geary, 1950. "A Note on "A Constant-Utility Index of the Cost of Living"," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 18(1), pages 65-66.
    11. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. António Afonso & Ludger Schuknecht & Vito Tanzi, 2005. "Public sector efficiency: An international comparison," Public Choice, Springer, vol. 123(3), pages 321-347, June.
    13. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Vitale, Paolo, 2006. "A Market Microstructure Analysis of Foreign Exchange Intervention," CEPR Discussion Papers 5468, C.E.P.R. Discussion Papers.
    2. Robalo Marques, Carlos & Dias, Daniel & Santos Silva, João M. C., 2006. "Measuring the importance of the uniform nonsynchronization hypothesis," Working Paper Series 606, European Central Bank.
    3. Antonio Afonso & Ludger Schuknecht & Vito Tanzi, 2010. "Public sector efficiency: evidence for new EU member states and emerging markets," Applied Economics, Taylor & Francis Journals, vol. 42(17), pages 2147-2164.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tumaniants, Karen A. (Туманянц, Карэн) & Sesina, Julia E. (Сесина, Юлия), 2017. "Social Expenditures of Russian Regions in Terms of “Input-Output” [Расходы На Социальную Политику Российских Регионов В Координатах «Затраты — Результат»]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 128-149, October.
    2. António Afonso & Ludger Schuknecht & Vito Tanzi, 2010. "Income distribution determinants and public spending efficiency," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 8(3), pages 367-389, September.
    3. Antonio Afonso & Ludger Schuknecht & Vito Tanzi, 2010. "Public sector efficiency: evidence for new EU member states and emerging markets," Applied Economics, Taylor & Francis Journals, vol. 42(17), pages 2147-2164.
    4. Ant—nio Afonso & Ludger Schuknecht & Vito Tanzi, 2023. "The size of government," Chapters, in: António Afonso & João Tovar Jalles & Ana Venâncio (ed.), Handbook on Public Sector Efficiency, chapter 1, pages 6-31, Edward Elgar Publishing.
    5. Christl, Michael & Köppl-Turyna, Monika & Kucsera, Dénes, 2018. "Public sector efficiency in Europe: Long-run trends, recent developments and determinants," Working Papers 14, Agenda Austria.
    6. Auerbach, Alan J. & Hines, James Jr., 2002. "Taxation and economic efficiency," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 21, pages 1347-1421, Elsevier.
    7. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
    8. António Afonso & José Alves & Najat Bazah, 2024. "Public Sector Efficiency and the Functions of the Government," CESifo Working Paper Series 11487, CESifo.
    9. Antonis Adam & Manthos Delis & Pantelis Kammas, 2011. "Public sector efficiency: leveling the playing field between OECD countries," Public Choice, Springer, vol. 146(1), pages 163-183, January.
    10. Will Martin & James E. Anderson, 2005. "Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects," Boston College Working Papers in Economics 617, Boston College Department of Economics.
    11. Antonis Adam & Manthos Delis & Pantelis Kammas, 2014. "Fiscal decentralization and public sector efficiency: evidence from OECD countries," Economics of Governance, Springer, vol. 15(1), pages 17-49, February.
    12. António Afonso & Ludger Schuknecht, 2019. "How “Big” Should Government Be?," Working Papers REM 2019/78, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    13. Aristovnik, Aleksander & Obadić, Alka, 2014. "Measuring relative efficiency of secondary education in selected EU and OECD countries: the case of Slovenia and Croatia," MPRA Paper 63936, University Library of Munich, Germany.
    14. Chris Jones, 2005. "Why the Marginal Social Cost of Funds is not the Shadow Value of Government Revenue," ANU Working Papers in Economics and Econometrics 2005-449, Australian National University, College of Business and Economics, School of Economics.
    15. Cosmin Eugen ENACHE, 2012. "The efficiency of expenditure-related redistributive policies in the European countries," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 5(18), pages 380-394.
    16. Sona Stikarova, 2014. "Economic growth, inequality and efficiency," Department of Economic Policy Working Paper Series 006, Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava.
    17. Eskeland, Gunnar S., 2000. "Environmental protection and optimal taxation," Policy Research Working Paper Series 2510, The World Bank.
    18. Aleksander Aristovnik, 2013. "Relative Efficiency of Education Expenditures in Eastern Europe: A Non-parametric Approach," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 3(3), pages 1-4, June.
    19. Azar Dufrechou, Paola, 2016. "The efficiency of public education spending in Latin America: A comparison to high-income countries," International Journal of Educational Development, Elsevier, vol. 49(C), pages 188-203.
    20. António Afonso & João Tovar Jalles & Ana Venâncio, 2021. "Taxation and Public Spending Efficiency: An International Comparison," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(3), pages 356-383, September.

    More about this item

    Keywords

    Government efficiency; excess burden; taxes; spending.;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ise:isegwp:wp52006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Vitor Escaria (email available below). General contact details of provider: https://aquila.iseg.ulisboa.pt/aquila/departamentos/EC .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.