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Über dieses Buch

Hans-Werner Sinn, Munich, West Germany This book contains 15 papers presented at a conference in Neresheim, West Ger­ many, in June 1986. The articles were selected by anonymous referees and most of them have undergone substantial revisions since their presentation. The common topic is measurement of welfare, both from efficiency and from equity perspectives. For many economists, welfare is a diffuse, arbitrary and am­ biguous concept. The papers collected in this book show that this view is not justified. Though not beyond all doubt, welfare theory today is crisp and clear, offering fairly straightforward measuring concepts. It even comes up with numbers that measure society's advantage or disadvantage from specific policy options in monetary units. Politicians get something they can intuitively understand and argue with, and they do not have to be afraid that all this is metaphysics or the result of the scientist's personal value judgements. Some economists, whom I would classify as belonging to the "everything is optimal" school, would claim that providing politicians with numerical welfare measures is superfluous or even dangerous. The world is as it is, and any attempt to give policy advice can only make things worse. I do not share this view. There are good policies and there are bad ones, but it may not be easy to distinguish between them. There is a role for consulting politicians, Dr.



Welfare and Efficiency Measures — General Aspects

Applied Welfare Economics and Frisch’s Conjecture

My objective in this paper is to consider a number of ambiguities which have arisen in modern applied welfare economics. At a technical level, I am not proposing to say anything new. Rather I will be concerned with the interpretation and critical assessment of some recent literature and the direction in which I believe this area of research should proceed in the future.
George McKenzie

A Reconsideration of Debreu’s “Coefficient of Resource Utilization”

Since Gerard Debreu introduced his “Coefficient of Resource Utilization” to the economic literature in 1951 this measure has always been present there in footnotes, “notes in the margin”, and so on, but there are only very few articles in which this measure played more than a mere tangential role. The main reason for this is, as I think, that many economists have the strong feeling that “there is something in it”, but that it is not quite clear what this really is. The intention of this paper is to review the Debreu Coefficient by first giving it an explicit mathematical form and then investigating its technical and economic properties in some detail.
Michael Ahlheim

Measuring Welfare Changes in Quantity Constrained Regimes

The concepts of compensating and equivalent variation have been widely used both in empirical and in theoretical work. The strengths and weaknesses of these concepts have been carefully investigated, and methods have been proposed to calculate exact measures instead of approximating measures. For a recent survey of the issues involved, see e.g. McKenzie (1983), and Takayama (1984).
Wilfried Pauwels

Poverty Measurement: A Survey

Though poverty is one of the most challenging problems from which mankind has ever suffered to my knowledge only one economist’s Nobel Lecture has dealt with this provocative issue. It began with the promising statement: “Most of the people in the world are poor, so if we knew the economics of being poor we would know much of the economics that really matters.”1 But then the curious reader will be rather disappointed discovering that this Nobel Lecture is mostly devoted to agricultural economics.
Christian Seidl

Poverty Measures, Inequality and Decomposability

In recent years the theoretical literature on the measurement of aggregate poverty has grown extensively, particularly with reference to the “aggregation problem”: the way in which one combines information about people’s incomes into an overall judgment about the extent of poverty given that one has already settled the questions of who is to be counted as poor and how their incomes or, living standards are to be measured.1 However many of the statistical devices that have been used to deal with the aggregation problem — from the elementary devices of “head-counts” and poverty gaps to the more recent sophisticated measures — seem to have an air of arbitrariness about their specification. This appears to be the case even where appeal is made to a set of axioms that seem to capture certain features of what people feel a poverty INDEX ought to do. Indeed, despite their intuitive and logical support, the alternative measures that have emerged in the literature may actually prove to be contradictory in their axiomatic structure as well as in their rankings of income distributions.
Frank A. Cowell

Computing Welfare Effects of Fiscal Policy Programmes

An Introduction to Applied General Equilibrium Tax Modelling

(With a Preliminary Application to the Reform of Factor Taxes in the FRG)
Applied General Equilibrium (AGE) Tax Models have become a wide-spread scientific tool, with a steadily increasing importance for the policy debate on tax issues.
Georg Hirte, Wolfgang Wiegard

Incidence Effects of Changing the German Income Tax Rate Schedule

As a result of the income tax rate reform, which is planned for the period 1986–1988 and which in part has already been implemented, the marginal tax rates in the progression ranges of the personal income tax are lowered and higher basic tax exemptions axe granted in the Federal Republic of Germany. To evaluate the long run incidence of such a tax change it is necessary to acquire knowledge about the induced long run changes of the welfare for various household groups in the society of Western Germany.
Manfred Rose, Hans Kungl, Bernhard Kühn

Income Tax Reduction and the Quantification of Welfare Gains — An Applied General Equilibrium Analysis

Recently a growing number of studies of the applied general equilibrium model type have been used to quantify and to simulate strategies in fiscal, economic and energy policy. In analyzing the impact of such programs on the total economy, models of the Keynesian type have lost their attraction. Their black box character with respect to the allocation mechanism of prices in the structure of production, sectored employment and income distribution makes it difficult to evaluate the outcome of the simulation. Some well-known studies of applied general equilibrium models used in evaluating fiscal policy measures are those by Shoven and Whalley (1972, 1973), Whalley (1975), Fullerton, King, Shoven, and Whalley (1981), Fullerton, Shoven, and Whalley (1983) and by Ginsburgh and Waelbroeck (1981). As a result of criticisms of these models, viz. the unrealistic assumptions on which these models are based, the restriction of perfectly competitive markets has been partially replaced by an assumption of imperfect competition. In addition, institutional conditioning factors are also considered (see Harris, 1985).
Klaus Conrad, Iris Henseler-Unger

Welfare and Efficiency of Selected Fiscal Policy Measures


On the Evaluation of Tax Systems

This paper is concerned with the excess burden from taxation. A simple definition of this concept is given by Auerbach in his recent survey: ‘The deadweight loss from a tax system is that amount that is lost in excess of what government collects’ (Auerbach, 1986, p. 67). At the same time he states ‘Unfortunately, while this definition makes intuitive sense, it is too vague to permit a single interpretation’ (emphasis added). Therefore there axe many different definitions of excess burden in the literature (e.g. Mohring, 1971; Diamond and McFadden, 1974; Kay, 1980; Pazner and Sadka, 1980; Zabalza, 1982). But a more careful investigation shows that essentially one can find only two types of measures.
Udo Ebert

Comprehensive versus Neutral Income Taxation

The income definition that has undoubtedly received most support from German and American tax theorists is the Schanz-Haig-Simons concept of demanding comprehensiveness (cf. Goode, 1977, p. 7). The idea is that all income should be taxed alike, irrespective of the source. If at all other income concepts are considered, then the discussion typically narrows down to ail act of choice between competing tax bases. Thus, Goode’s otherwise commendable survey of income concepts ends with “the conclusion that the S-H-S definition of income is much better for tax purposes than other definitions” (Goode, 1977, p. 28). It is not that conceptual and administrative problems were played down or even denied, it is that other concepts such as the Hicksian (1939, 1968) economic yield of capital, axe seen as posing even more problems.
Wolfram F. Richter

Neutral Taxation of Risky Investment

Since John Stuart Mill (1886), the venerable “leave-them-as-you-find-them”-rule is primarily interpreted as an efficiency requirement. Taxes should be levied in such a manner that scarce resources axe not diverted from more to less productive employments1. This view by far dominates the modern neoclassically oriented Theory of Public Finance, where allocative neutrality serves as the fundamental benchmark for the evaluation of tax measures and tax systems. A tax design, for example, is investigated which avoids perturbations of the real and financial decisions of a firm.2 But in this context until the present time a rather important topic has only been treated superficially. Rather independently from the mainstream analysis of investment behaviour, a particular branch of the literature has developed in which the risk dimension of investment decisions is emphasized.3 This paper presents a discussion of the question of tax neutrality within this framework. Above all, the question of which taxes can be neutral if a certain structure of individual risk preferences is assumed will be examined. In principle, this question was already put forward by Feldstein (1969) in his pioneering article about tax effects on risk taking. His considerations were restricted to the case of utility functions with constant relative risk aversion.4
Wolfgang Buchholz

Public Expenditures

On Measuring the Welfare Cost of Public Expenditure: A Simple General Equilibrium Approach

Economists have long been aware that taxes produce a welfare cost (efficiency loss, excess burden) to the economy by distorting resource allocation. In view of the concern of economists over resource allocation, it is surprising how few studies attempt to calculate this welfare cost. The pioneer in this work has been Harberger (1964a, 1964b, 1966, 1974) who has drawn on Hotelling’s (1938) earlier formulations and provided calculations of the welfare costs of a number of tax distortions.
Wilhelm Pfähler

Privatization of Public Enterprises

Welfare Effects of Privatizing Public Enterprises

If a public firm is privatized, most probably the productive efficiency of the firm will increase. The efficiency gains will improve welfare. However, the privatized firm will tend to increase profit. Then a welfare optimum is achieved only if the firm operates in a perfectly competitive environment. Otherwise the profit maximization reduces welfare. However, the profit can be redistributed among consumers as dividend payments which increase incomes and thereby increase welfare. Part of the increased profit, moreover, may remain in the public budget and be used to increase government expenditures. And the revenue from selling the shares will also be spent as government expenditures. The increasing expenditures will increase the welfare. Given the different welfare effects of privatization: how many shares of a public firm shall be sold and what are the economic consequences of an optimum privatization?
Dieter Bös

Environmental Policies

Measuring Environmental Benefits: A Comparison of Hedonic Technique and Contingent Valuation

As it is well known there is a substantial gap between the rigorous and elegant definition of welfare change and benefits derived from theoretical welfare economics and their empirical estimate. This holds especially in the case of public goods such as, e.g., environmental improvements originating in reduced air or water pollution and noise reduction, all of them characterized by non-divisibility and non-rivalness in consumption. Consequently, there are no markets, no customers, no sales and, thus, no cheap information on the benefits of environmental improvement. However, it is important for decision makers in the public sector to have an idea about individual demand of such public goods and their related benefits. This information is necessary to undertake benefit-cost analysis, which is the major tool for evaluating and selecting those policy alternatives which contribute to more effective resource utilization.1
Werner W. Pommerehne

Economic Impact of Emission Standards: A Computational Approach to Waste Water Treatment in Western Europe

Pollution, in its many forms, is widely regarded as our major environmental problem. As the entropy law tells us, the industrial process is inescapably connected with a continuous flow of pollution and causes irreversible ecological change. Economic growth means, among other things, that more and more raw materials and energy have to be put into circulation, producing an increasing amount of waste which is then discharged into the environment. Without some kind of pollution control, nature’s assimilative capacities could be reached or even surpassed in the long-run and an irreversible degeneration of the ecological system might be the consequence.
Gunter Stephan


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