Integrating expenditure and tax decisions: The marginal cost of funds and the marginal benefit of projects

This paper seeks to clarify the extent to which the rule for providing publ ic goods ought to correct for the distortionary cost of raising funds. We a rgue that, in evaluating public projects, the marginal cost of funds (MCF) concept must be supplemented by a symmetrical concept, which we label the m arginal benefit of public projects, or MBP, which indicates the value to in dividuals of the dollars spent. Each of these concepts can be decomposed in to two separate components, one reflecting efficiency and the other charact erizing the distributional impact of the project itself or its financing. W e conclude that efficiency of the financing cannot be ignored, that distrib utional considerations are also relevant, and that the availability and opt imality of tax instruments is critical for evaluating the appropriateness o f proceeding with a public good-cum financing project. However, one can con struct special cases, as in Kaplow (1996), where the simple cost-benefit cr iterion applies.