The marginal welfare cost of public funds: Theory and estimates

We derive a general analytic formula for the marginal welfare cost (MWC) of public funds without imposing restrictive assumptions on preferences or technologies. The framework encompasses the various special cases previously considered, and reconciles the disparities among the reported estimates of MWC. Unresolved differences in existing estimates are fully explained by appropriate interpretations of intended thought experiments and alternative assumptions about the elasticity of labor supply with respect to public spending. Further progress in measuring MWC requires empirical estimation of labor-supply functions that include government spending as an explanatory variable.