Disequilibrium and the Welfare-Maximising Levels of Government Spending, Taxation and Debt.

A "disequilibrium" framework, which extends that of R. J. Barro and H. I. Grossman_(1971) and E. Malinvaud_(1977) to include overlapping generations and dynamics due to perfect foresight and t he accumulation of bonds and capital, is used to determine when a welfare-maximizing fiscal policy requires a higher level of government spending than in Walras ian equilibrium. When deficits are permitted, optimum spending either equals the Walrasian optimum, or differs in a way depending arbitrarily on preferences. When a balanced budget is imposed, two situations which may justify spending clearly above the Walrasian optimum are: _(1) when capital accumulation is included;_(2) when spending provides utility to consumers. Copyright 1987 by Royal Economic Society.