Optimal income taxation, public goods provision and public-sector pricing: A contribution to the foundations of public economics

The paper develops an integrated model of optimal nonlinear in-come taxation, public-goods provision and pricing in a large economy with private information about labour productivities and public-goods preferences and with binding participation constraints and/or distrib-utive concerns. With binding participation constraints, it is desirable to use nonlinear income taxes as well as admission fees for public-goods nance. With (su ¢ ciently large) inequality aversion, it is desirable to use admission fees as well as income taxes for redistribution. In either case, optimal income taxes and admission fees on excludable public goods satisfy a version of the Mirrlees and Ramsey-Boiteux tax formu-lae. A renegotiation proofness condition on the consumption side of the allocation is used to write the incentive constraints for the multidimen-sional hidden characteristics as multiple unidimensional constraints