Subsidies financed with distorting taxes. National Tax Journal | June 1, 1993| | COPYRIGHT 1993 National Tax Association. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan.  All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information) Copyright

An important part of government spending is devoted to the subsidization of the production (or consumption) of particular goods and services, Externalities are often cited as the justification for such subsidies, and the familiar textbook analysis illustrates how to determine the optimal Pigovian subsidy, where the subsidy per unit should equal the marginal external benefit (MEB) at the efficient level of output. This analysis is, however, incomplete, because it implicitly assumes there is no welfare cost associated with raising the tax revenue necessary to finance the ...

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