Social Welfare and Coercion in Public Finance

This paper develops an expanded framework for social planning in which the existence of coercion stemming from the provision of public goods is explicitly acknowledged. Key issues concern the precise definition of coercion, its difference from redistribution, and its incorporation into normative analysis. We explore modifications to traditional rules for optimal fiscal policy in the presence of constraints on coercion and determine the degree of coercion implied by traditional social planning. In addition, the trade-off between social welfare and coercion is mapped under specific conditions and the implications of this trade-off for normative policy choice are considered. Analysis of the trade-off suggests that democratic societies may be on a backward bending part, where the shadow price of coercion is negative and improvements in both social welfare and the degree of coercion may be possible.