Shadow-Pricing Interpretation of the Pigovian Rule for the Optimal Provision of Public Goods.

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 discussed by Diewert (1983) and Hammond (1986). Our formula for the Pigovian rule is compared with that given by Wildasin (1979) for cases in which indirect taxes are set optimally. The approach introduced in teh present study provides a clear interpretation of Widsasin's result.