Tax and Expenditure Incidence with Decreasing-Cost Services
As long as decreasing-cost services are being analyzed within the context of first-best theory, the government is assumed to charge a price equal to the marginal cost of providing the service and to finance with lump-sum taxes the deficits arising because MC < AC. The appropriate comparison is an all-or-none test in which having the service with these characteristics is compared to not having the service at all. Marginal incidence analysis is not relevant for decreasing-cost services.
The income-compensation measure of incidence was developed in Chapter 9. Assuming linear or constant-returns-to-scale (CRS) general production technology elsewhere in the economy, the net benefit of providing ...
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