James P. Feehan

Optimal Provision of Hicksian Public Inputs

A considerable portion of government spending is devoted to commodities that are not public goods but that directly affect production possibilities. Examples include public infrastructure like roads and dams; educational facilities and research projects in basic science; and some forms of information. Such commodities are public inputs. In a small open economy context, the focus of this paper is on those that are Hicksian in nature. An interesting decomposition of the beneficial impact of a Hicksian public input is developed. Then first-best and second-best optimality conditions for public inputs that are comparable to those for collective consumption goods are derived.

Labor and Capital Taxation with Public Inputs as Common Property

The services of many public inputs (e.g., dams, irrigation systems, and highways) are provided to private firms on a free-access basis. If these services enter constant-returns-to-scale production functions then there are decreasing returns to scale in the private factors. Thus a change in the amount of a public input gives rise to positive rent or economic profit in the first instance. The authors extend the literature by recognizing that this rent cannot be an equilibrium phenomenon. Private agents will engage in rent-seeking that will ultimately lead to dissipation. This makes a public input equivalent to a common property resource, which, in the absence of the appropriate price or quantity rationing, gives rise to inefficiency. Using a model with capital and labor as private inputs, the authors show it is optimal to tax capital even though a labor tax is available and capital is internationally mobile. Production efficiency also holds since our policy supports the first-best equilibrium despite decreasing returns to scale in private inputs.

Efficient tariff financing of public goods

Abstract For some countries tariff-generated revenues may be the main method available for financing public goods. There is a trade-off between the distortionary effects of a tariff and the benefits of the public good which it finances. This paper employs the Heckscher-Ohlin-Samuelson model to examine that trade-off. The result is an efficiency rule for provision of the public good. That rule is compared to the Atkinson and Stern (1974) rule. It is found that the ranking of the factor intensities of production is crucially important in determining the marginal cost of the public good.

Empirical Impact of Public Infrastructure on the Japanese Economy

We study the impact of public capital investment on individual sectors of the Japanese economy using time-series data for the period of 1970-1998. We employ a production function approach and also estimate a dynamic VAR/ECM model. We find significant differences in the employment effects, output effects and private investment effects across sectors. Public capital investment has a positive effect on employment in the finance, insurance and real estate (FIRE), manufacturing, construction and utilities sectors; on private investment in the FIRE, agriculture, transportation, trade and services sectors; and on output in the mining, FIRE, trade and manufacturing sectors.

Contributions to International Public Goods and the Notion of Country Size

There is no consistent notion of country size in the literature on the voluntary provision of an international public good. This paper suggests preference-adjusted GNP as a useful index of size. Defining a country s size in that manner, contributing countries are unambiguously larger than free riders. But, interestingly, a larger contributing country does not necessarily contribute more than a smaller one. In the special case when all the contributing countries are of equal size, the one with stronger (weaker) preference for the public good will contribute less (more). In another special case when one of the countries is sufficiently larger than the rest, only this largest country will contribute. These results may help in explaining the diversity in cost-sharing across different international public goods.

Trade Liberalization, Economic Integration and National Public Goods

Policy and political debates over the merits of economic integration are multidimensional. One important dimension not well considered by economists relates to public goods. This paper examines the attractiveness of trade liberalization in the presence of national public goods. The existence of national public goods may imply that there is an optimal level of international economic integration beyond which further integration generates costs in excess of benefits. Using a simple model of a small open economy, it is found that free trade remains advantageous in the presence of national public goods. If there is a limit to the extent to which countries may beneficially integrate when there are public goods then it occurs at higher levels of integration. [F15, H41]

Canada's Equalization Formula: Peering Inside the Black Box...And Beyond

Ontario only started receiving equalization payments, for the first time in its history, in 2009. As soon as Ontario slipped into that “have-not�? status, the federal government imposed a cap on the growth of equalization payouts. That led to substantial federal savings, but has cost Ontario and other recipients what would have been much larger payments since then. The federal government’s move to rein in the potential ballooning cost of equalization may have been understandable, from a cost-control perspective, but it ultimately defied the very purpose of equalization. The fixed-growth rule imposed by the federal government is just one of several elements within the current equalization arrangement that should be corrected. The federal government should end that practice and absorb any resulting increase in cost. However, if that cost is onerous, then it could consider adjustments of its other major transfers to the provinces – Canada Health Transfer and the Canada Social Transfer – and reduce those per-capita transfers to provinces that are well ahead of the equalization norm. That would be better than shifting the entire burden to the those below the norm. Another flaw in the current equalization arrangement is the inclusion of Crown-owned hydro corporations’ remittances of earnings to their provincial owners in the natural resources category of equalization calculations. Many of these corporations are not simply energy producers, but are also vertically integrated, with transmission and retail sales operations, and some have no resources at all, but rely instead on fuel purchased in the marketplace. Moreover, taxes paid by private energy corporations are not considered part of the natural resource category but are included in the business income tax category. This means the formula is essentially inconsistent, discriminating based on the ownership profile. Hydro remittances should be removed from the natural resource revenue category in the formula that calculates equalization. They should go in the business income tax category, just as do the earnings of other commercial Crown corporations and taxes paid by private businesses. Going beyond the formula, it is time to re-consider the practice of exempting commercial Crown corporations from corporate income taxation. A more fundamental and long-recognized problem is the incentive for provinces receiving equalization payments to underprice the water-rental rates they charge for hydro production. Lowering water-rental rates has the effect of reducing provincial hydro revenues, which can entitle those provinces to larger equalization payments, while benefitting residents with cheaper hydro rates. Looked at empirically, “have-not�? provinces do charge lower average rates for hydro than do “have�? provinces, lending credence to the criticism that non-recipient provinces subsidize cheaper energy for residents of recipient provinces. The increased development of competitive North American wholesale electricity markets in recent decades has made it more feasible to assess what a fair market price for water-rental rates could be. Updating the equalization formula to consider not water-rental revenue, but water-rental fiscal capacity, should be the highest priority of all in reforming Canada’s equalization formula to align it more closely to the principles behind its creation. It is also time to include municipal government revenues from user fees in the formula. Those revenues are significant and it makes little sense to exclude them when municipal property tax revenues are included. Equalization is not out of control but reform is needed. Action on these fronts should be the priorities. These inside- the-box issues should be resolved before going beyond and considering the more complex task of extending the formula to account for provincial governments’ different expenditure needs and costs.

Charles Taylor and Liberia: ambition and atrocity in Africa's lone star state

Colin M. Waugh, London and New York: Zed Books, 2011, x + 374 pp. Colin Waughs book is both informative and thought-provoking. It provides insights not just into Charles Taylor but also into the i...

Atlantic Provinces Economic Union

Economic disparity between the Atlantic Provinces and the rest of Canada persists. The possibilities of reduced federal government transfers and Quebec separation further threaten the region. Maritime Union, a proposal that has a long history, has resurfaced in a modern form: economic union of the Atlantic provinces. This paper assesses the potential of further economic integration of the Atlantic provinces for alleviating disparity and insulating the region from the more recent threats. An economic unions beneficial impact would be close to negligible.