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Measurement of the social loss of wrong public budget allocation

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Purpose ‐ The purpose of this paper is to measure the social loss occurring due to the inability of the government to use the real public demand function. Design/methodology/approach ‐ The authors developed a model that enables maximization of the public utility of a given public budget by maximizing total consumer surplus, and presented a method for calculating the social loss due to the inability to use the real public demand function. Findings ‐ The social loss occurring due to the inability of the government to use the real public demand curve was shown. Research limitations/implications ‐ In reality, it is impossible to get the proper evaluation of social utility function. Instead, the authors assumed a given public demand for each public good. Practical implications ‐ The paper presents a way to measure overtime social loss as a function of the sum of overtime government expenses, the coefficient of variation of the public good supply and the elasticity of demand of the average demand curve. Social implications ‐ Improving the allocation of public budget. Originality/value ‐ Given the demand curve for each public good, this paper presents a technique for the optimal allocation of a given budget in order to maximize aggregate consumer surplus.
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Keywords: Capital budgeting; Government policy; Public finance; Social economics

Document Type: Research Article

Publication date: February 15, 2011

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