Funding Public Goods Through Dedicated Taxes on Private Goods

Abstract

We examine dedicated taxes, i.e., taxes on private goods used to finance public good provision, in a game-theoretic model of impure public goods. We show that a dedicated tax can increase or decrease demand for the taxed good. The optimal dedicated tax cannot, in general, achieve the Pareto optimal allocation, but it can generate a conditionally efficient equilibrium with comparatively more or less public good provision, depending, in part, on complementarity or substitutability between the private and public good. We also demonstrate a neutrality result: when individuals can make direct donations, sufficiently low dedicated taxes will not impact equilibrium allocation.