Benefit-Cost Analysis and Distortionary Taxes: A Public Choice Approach

Abstract

The fundamental rule of benefit-cost analysis is that if taxes are non-distortionary, then a necessary condition for efficient supply of any public good is that the sum of individual marginal rates of substitution between public and private goods equals the marginal cost of the public good. In a world where taxes distort and where most public decisions are not between Pareto-ranked alternatives, decision makes have a right to ask economic theorists for more detailed and useful advice.