Funding Public Goods through Dedicated Taxes on Private Goods

We examine dedicated taxes (i.e., taxes on private goods used to finance pub-lic good provision) in a game-theoretic model of impure public goods. We show that a ded-icated tax can increase or decrease demand for the taxed good. The optimal dedicated tax generally cannot achieve the Pareto-optimal allocation, but it can generate a conditionally efficient equilibrium with comparatively more or less public good provision, depending in part on complementarity or substitutability between the private and public good. We also demonstrate a neutrality result: when individ-uals can make direct donations, sufficiently low dedicated taxes will not impact equilibri-um allocation. (JEL H21, H41)