Public Provision of Private Goods and Nondistortionary Marginal Tax Rates

Using an optimal taxation model combined with a previously neglected scheme of public provision of private goods, we show that there is an efficiency gain if public provision of selected goods replaces market purchases and that efficiency requires marginal income tax rates to be higher than if the goods were purchased in the market. Part of the marginal tax serves the same role as a market price and conveys information about a real social cost of working more hours. It might be that economies with higher marginal tax rates have less severe distortions than economies with lower marginal tax rates. (JEL H21, H42, I38)