Chapter 13: Rent seeking through public finance
This chapter reviews the consequences for basic public finance theorems when revenue from various sources is a contestable rent. The basic theorems change because revenue, which is viewed in the orthodox public finance literature as a transfer that facilitates social benefit through public spending, becomes a source of social loss through the wasteful use of resources when that revenue is contestable. In a world of rent seeking, pure rent taxes seem to be a mirage. The Ramsey rule for efficient taxation need no longer apply. Basic theorems about the Pigovian externality-correcting tax and efficient user charges based on peak and off-peak demand are compromised.
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