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The Desirability of In-kind Transfers in the Presence of Distortionary Taxes

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Abstract

A standard argument in welfare economics maintains that private goods should not be publicly provided, because cash transfers are always superior to in-kind transfers. However, this conclusion does not hold in second best economies. A strong case for the desirability of in-kind transfer in the presence of distortionary taxes has been made in various recent contributions. Here, we survey the arguments provided in these papers, using a common theoretical framework which enables us to present more clearly the similarities and the differences among the various papers. The use of a common formal model helps us to show how the rationale for public provision of private goods is sensitive to the form of the tax system. It also helps us to provide an explanation why mandatory and non-mandatory in-kind transfer schemes have the same effects on social welfare. Finally, we offer some considerations on the relevance of the theory of in-kind transfers for policy action. JEL Classification Number: H42

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