Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: Kaplow (1996) and others argue forcefully in favor of using the standard cost-benefit test alone, without any distributional concern, given “standard simplifying assumptions.” This paper, on the contrary, demonstrates that distributional weights, equal to the social marginal utility of income, should be applied in cost-benefit analysis, given weak separability in public goods instead of in leisure. This result holds for linear as well as non-linear income taxes, and whether they are optimal or not. A correspondingly modified Samuelson rule is derived and more general policy recommendations discussed.

Keywords: public goods; distributional weights; equity and efficiency; separability; cost-benefit; optimal taxation

JEL-codes: D61; H21; H41

22 pages, February 28, 2001

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