Input and Output Price Distortions Facilitating the Provision of Public Goods

William E. Foster, Gordon C. Rausser
June 1992  [90-GATT 16]

Two important issues in the context of the provision of public goods are examined: the preference of price-distorting over nondistorting transfers, and the choice of specific output or input markets to carry the distorting taxes or subsidies. An explanation is given as to why some industries have more price distortion per dollars transferred due to firm heterogeneity rather than industry lobbying power. In the framework presented, a government desires to target transfers to a subset of heterogeneous innovators to circumvent obstruction of producer-harming policies such as public investment in supply-enhancing R&D. We also offer an explanation for the use of output taxes and input subsidies in developing countries in contrast to output subsidies and input restrictions in developed countries' agricultural sectors.

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