Working Paper: NBER ID: w30213
Authors: Erzo FP Luttmer
Abstract: Subsidies and in-kind transfers give rise to negative fiscal externalities. However, internalizing negative fiscal externalities through taxation would undo the subsidy or in-kind transfer that caused them. Similarly, positive fiscal externalities cannot be internalized though government subsidies. This paper describes a mechanism that transfers fiscal externalities from the government to private parties. Such transfers generate incentives within the private sector to reduce inefficiencies caused by fiscal externalities. Thus, the paper offers a straightforward, but powerful, insight: transferring fiscal externalities to third parties extends the reach of the Coase Theorem to inefficiencies stemming from fiscal externalities.
Keywords: No keywords provided
JEL Codes: D02; H10; H23; O35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transfer of fiscal externalities (H23) | Collaborative behavior modifications (C92) |
| Collaborative behavior modifications (C92) | Enhanced total surplus (D69) |
| Current tax subsidy or in-kind transfer (H20) | Negative fiscal externalities (D62) |
| Negative fiscal externalities (D62) | Efficiency losses (D61) |
| Transfer of fiscal externalities (H23) | Reduction of inefficiencies (D61) |
| Competition among private parties (L49) | Innovative solutions (O36) |
| Efficiency gains (D61) | Better understanding and response to individual needs (I39) |
| Government intervention (O25) | Constraints by bureaucratic limitations (D73) |