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A Simulation on the Public Good Provision Under Various Taxation Systems

Procedia Computer Science
DOI: 10.1016/j.procs.2014.05.294
  • General Equilibrium
  • Public Good
  • Lindahl Mechanism
  • Income Tax
  • Commodity Tax
  • Poll Tax
  • Walrasian Tatonnement


Abstract This paper integrates two traditions in taxing theory by constructing a primitive general equilibrium (GE) model which incorporates a public good, and examine the desirability of taxing system to sustain its optimum level. Formally, we start with utilizing the Lindahl mechanism to compute a Pareto-optimal public good level under a specification of the parameters on production and utility function, with k the substitution parameter on the latter. The burden-sharing in this Lindahl mechanism is called the Lindahl tax. We compute the rates of various taxes in order to sustain the optimal public good level, and compare the Gini coefficients and the social welfares. It is shown for a specified case that when 0<k<1, there exists no general equilibrium for the poll tax case, while the income tax (and proportional commodity tax) is more desirable than the Lindahl tax from the viewpoint of Gini coefficient and also from the utilitarian social welfare viewpoint. Next, selecting parameters on production and utility functions and initial endowments randomly, we show that the property is robust, provided that 0<k<1. However, when k<0, the same simulation shows that the Lindahl tax is more desirable than the income tax (and proportional commodity tax) from the two viewpoints. Finally, it is shown that when 0<k<1, the Walrasian tatonnement process to compute the income tax is globally stable, while the one when k<0 is locally unstable. Thus, this paper concludes that the income tax (and the proportional commodity tax) tends to be superior to the Lindahl tax in order to provide public good.

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