Chapter

Revised Shadow Prices

Chris Jones

in Applied Welfare Economics

Published in print May 2005 | ISBN: 9780199281978
Published online July 2005 | e-ISBN: 9780191602535 | DOI: http://dx.doi.org/10.1093/0199281971.003.0006
Revised Shadow Prices

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Governments rarely raise revenue with lump sum transfers. Instead, they use distorting taxes, and this must be reflected in cost-benefit studies. The conventional welfare analysis in previous chapters is revised to include changes in tax inefficiency when distorting taxes are used to balance the government budget. This involves a simple revision to the conventional (lump sum) shadow prices, in which the revised shadow price of any good is its conventional shadow price plus the change in tax inefficiency on the revenue transfers made with distorting taxes. This adjustment is used in the next chapter to demonstrate the role played by the marginal social cost of public funds (MCF) in project evaluation. Finally, the Hatta (1977) decomposition is extended to revised shadow prices where the income effects are isolated in the revised shadow value of government revenue. It is used in following chapters to measure the distributional effects of policy changes when governments make revenue transfers with distorting taxes.

Keywords: compensating transfers; marginal excess burden of taxation; revenue transfers; revised shadow prices; revised shadow value of government revenue; tax inefficiency

Chapter.  7260 words.  Illustrated.

Subjects: Public Economics

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