Public Economics Lectures Part 1: Introduction

Effi ciency Cost: Marshallian Surplus
Alternative representation for marginal excess burden can be obtained
using data on government budget R(τ) = Qτ
MEB equals the difference between the “mechanical” revenue gain
and the actual revenue gain
Mechanical revenue gain: ∂R
∂τ
| Q = Q
Actual revenue gain: ∂R
∂τ
= Q + τ dQ
dp
Difference between mechanical and actual revenue gain:
∂R
∂τ | Q − dR
dτ
= Q − [Q + τ dQ
dp ] = τ dQ
dp
= −τ dQ
dt
p Q
Q p = τ p η Q Q = ∂E
∂τ
Intuition: leakage in government revenue measures distortion
Public Economics Lectures () Part 3: Effi ciency 15 / 105