PUBLIC-GOODS AND DYNAMIC EFFICIENCY - THE MODIFIED SAMUELSON RULE

It is well known that the use of distorting taxes to finance a public good in a static economy may indirectly raise the social cost of the public good because of the deadweight loss associated with the tax system. However, the tax system may also affect the dynamic efficiency of the economy. We provide an example where the use of distorting taxes lowers the social cost of a public good in a steady state relative to the first-best case due to the effect of the government's tax policy on the dynamic efficiency of the economy. © 1990.