Shadow-Pricing Interpretation of the Pigovian Rule for the Optimal Provision of Public Goods: A Note

The Pigovian rule for the optimal public goods provision with distortionary taxation is given a new interpretation. It relates the Pigovian rule to project evaluation rules in terms of shadow prices. Our formula for the Pigovian rule is compared with that given by existing literature for cases in which commodity taxes are set optimally to articulate the implications of their results. This approach also renders a clear insight on the nature of resource allocation and income redistribution effect involved in the public goods provision in a heterogeneous-consumers economy. Copyright Kluwer Academic Publishers 2002