ON THE INTERPRETATION OF THE MODIFIED SAMUELSON RULE FOR PUBLIC-GOODS IN STATIC MODELS WITH HETEROGENEITY

Pigou argued that use of distorting taxation would increase the social cost of a public good due to the excess burden created by a distorting tax system. Samuelson's rule governing a pure public good must then be modified. A second-best rule has appeared in the literature when heterogeneity exists and an interpretation for the various effects captured by the additional terms appearing in the rule has been given. We present a counterexample to the standard interpretation and provide an alternative derivation and interpretation which allows us to make a more precise distinction among the effects mentioned in the literature. © 1990.