Public Good Provision Financed by Nonlinear Income Tax Under Reduction of Envy

We examine optimal taxation and public good provision by a government that considers reduction of envy as a constraint. We adopt the extended envy-freeness proposed by Diamantaras and Thomson (1990. "A Refinement and Extension of the No-Envy Concept." Economics Letters 33: 217-22), called lambda-equitability. We derive the modified Samuelson rule under an optimal nonlinear income tax and show, using a constant elasticity of substitution utility function, that the direction of distorting the original Samuelson rule to relax the. envy-free constraint is crucially determined by the elasticity of substitution. Furthermore, we numerically show that the optimal level of provision increases (decreases) in the degree of envy-freeness when the original Samuelson rule is upwardly (downwardly) distorted.