The benefit principle is a concept in the theory of taxation from public finance. It bases taxes to pay for public-goods

expenditures An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is ...

on a politically-revealed

willingness to pay In behavioral economics, willingness to pay (WTP) is the maximum price at or below which a consumer will definitely buy one unit of a product.Varian, Hal R. (1992), Microeconomic Analysis, Vol. 3. New York: W.W. Norton. This corresponds to the st ...

for benefits received. The principle is sometimes likened to the function of

prices A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in t ...

in allocating private goods. In its use for assessing the efficiency of taxes and appraising

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variabl ...

, the benefit approach was initially developed by

Knut Wicksell Johan Gustaf Knut Wicksell (December 20, 1851 – May 3, 1926) was a leading Swedish economist of the Stockholm school. His economic contributions would influence both the Keynesian and Austrian schools of economic thought. He was married to t ...

(1896) and Erik Lindahl (1919), two economists of the Stockholm School. Wicksell's near-unanimity formulation of the principle was premised on a

just Just or JUST may refer to: __NOTOC__ People * Just (surname) * Just (given name) Arts and entertainment * ''Just'', a 1998 album by Dave Lindholm * "Just" (song), a song by Radiohead * "Just", a song from the album '' Lost and Found'' by Mudvayn ...

income distribution. The approach was extended in the work of Paul Samuelson, Richard Musgrave,Bernd Hansjürgens, 2000. "The Influence of Knut Wicksell on Richard Musgrave and James Buchanan", ''Public Choice'', 103(1/2), pp
95
116. and others. It has also been applied to such subjects as tax progressivity, corporation taxes, and taxes on property or

wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...

. The unanimity-rule aspect of Wicksell's approach in linking taxes and expenditures is cited as a point of departure for the study of constitutional economics in the work of James Buchanan.

Overview

:Thus, considered in themselves, in their own nature, in their normal state, and apart from all abuses, public services are, like private services, purely and simply acts of exchange. -

Frédéric Bastiat Claude-Frédéric Bastiat (; ; 30 June 1801 – 24 December 1850) was a French economist, writer and a prominent member of the French Liberal School. A member of the French National Assembly, Bastiat developed the economic concept of opportu ...

The benefit principle takes a market-oriented approach to taxation. The objective is to accurately determine the optimal amount of revenue that should be spent on public goods. * More equitable/fair because taxpayers, like consumers, would "pay for what they get" * Taxes are more akin to prices that people would pay for government services *

Consumer sovereignty Consumer sovereignty is the economic concept that the consumer has some controlling power over goods that are produced, and the idea that the consumer is the best judge of their own welfare. ''Consumer sovereignty in production'' is the controll ...

- specific rather than general...charges are more direct...so the

preferences In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision t ...

of taxpayers, rather than government planners, are given more weight * More efficient allocation of limited resources...it is less likely that funds will be overinvested in low priority programs. *

There's no such thing as a free lunch "There ain't no such thing as a free lunch" (alternatively, "There is no such thing as a free lunch" or other variants) is a popular adage communicating the idea that it is impossible to get something for nothing. The acronyms TANSTAAFL, TINSTAA ...

- taxpayers would have a better understanding of the costs of public goods * Provides the foundation for voluntary exchange theory.

Examples

Here are a few of the public services that are currently funded, in some part, on the basis of the benefit principle... * Public college tuition (only paid by the people who attend public colleges) * National park admission fees (only paid by the people who visit public parks) * Fuel taxes (only paid by the people who purchase fuel) * Bus fares (only paid by the people who take the bus) * Bridge tolls (only paid by people who use the bridge)

Passages

:Until people are made to bear the full costs of their decisions, those decisions are unlikely to be socially sound, in this as in other areas of public policy. - Bird, Richard M. (1976). ''Charging for Public Services: A New Look at an Old Idea'' :The doctrine of consumer sovereignty is applied to the provision of social goods in so far as the consumer buys national defence, police service, fire protection and electricity or water supply from the public sector of his own choice and according to the benefits received just as he buys food, clothes, fuel, tooth brushes and automobiles from the private producers. - P.C. Jain (1989), The Economics of Public Finance, 2nd ed., v. 1, p
63.

Criticism

The free-rider problem is the primary criticism given for limiting the scope of the benefit principle. When information about marginal benefits is available only from the individuals themselves, they tend to under report their valuation for a particular good, this gives rise to the preference revelation problem. Each individual can lower his tax cost by under reporting his benefits derived from the public good or service. One solution would be to implement

tax choice In public choice theory, tax choice (sometimes called taxpayer sovereignty, earmarking, or fiscal subsidiarity) is the belief that individual taxpayers should have direct control over how their taxes are spent. Its proponents apply the theory of ...

. If taxpayers had to pay taxes anyway, but could choose where their taxes went (without the possibility of secret rebates or similar), then they would have no incentive to hide their true preferences.The Economics of Earmarked Taxes
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References

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Overview

Examples

Passages

Criticism

See also

References

Further reading