Privatization, public investment, and capital income taxation

This paper investigates the optimal line of demarcation between the public and private production sectors, as affected by the government's privatizati on decision. Only the private sector is subject to taxation in the form of investment taxes. In deciding on privatization, the government trades off t he tax distortion affecting private production against the relative product ion inefficiency of public production. At the optimum, the public sector is 'too large' in the sense that the government carries out some production a ctivities where it is inefficient relative to the private sector. Also, pub lic production is relatively capital-intensive. (C) 2001 Elsevier Science B Y All rights reserved.