Public debt and opportunity costs of public investment

In the paper we discuss investment- and financing rules for the public sector to maximize a social welfare function. We show, that in the long run the opportunity costs of credit financed public investments exceed the opportunity costs of tax financed public investments. Financing public investment by credits is only justified if a considerable under-supply of public capital exist initially. We illustrate this result by a simulation. Nevertheless, it can be shown that the German government chanced its financing policy in the 70s from tax to credit financing.