Public goods, tax policies, and unemployment in LDCs

We build a general equilibrium model of a small open economy characterized by unemployment and producing two privately traded goods and one nontraded public consumption good. The provision of public good is financed with an i ncome tax or an excise tax on the manufactured good or an import tariff. Wi thin this framework, the paper examines the effects of such policies on the country's unemployment ratio and welfare, and it derives the efficiency ru les for public good provision for each policy instrument. It shows, among o ther things, that the private marginal cost of the public good always overs tates its social marginal cost in the case of income taxes and may overstat e it in the case of an excise tax on the manufactured good or a tariff even if the taxed good and the public good are substitutes in consumption.