Skip navigation
Hardcover | $9.75 Short | £6.95 | ISBN: 9780262042505 | 352 pp. | 7 x 9 in | 40 figures, 32 tables | April 2008

Look Inside

Instructor Resources

The Marginal Cost of Public Funds

Theory and Applications


The marginal cost of public funds (MCF) measures the loss incurred by society in raising additional revenues to finance government spending. The MCF has emerged as one of the most important concepts in public economics; it is a key component in evaluations of tax reforms, public expenditure programs, and other public policies. The Marginal Cost of Public Funds provides a unified treatment of the MCF, carefully developing its theoretical foundations in a variety of contexts and describing its application to a wide range of policies—from excise taxes in Thailand to public sector borrowing in Canada and the United States.

The Marginal Cost of Public Funds
develops the basic theory of the MCF within the framework of public economics and shows how it is related to the traditional measures of the efficiency loss from distortionary taxation. The MCF concept is then applied to the major sources of revenues for governments—sales and excise taxes, taxes on labor income, taxes on the return to capital, public sector borrowing, and intergovernmental grants. This book will be an essential reference for economists and public policy analysts both in and out of government. Exercises and recommendations for further reading at the end of each main chapter highlight its usefulness as a supplementary text in advanced undergraduate or graduate courses in public economics.

About the Author

Bev Dahlby is Professor of Economics at the University of Alberta and a coauthor of Public Finance in Canada, second edition. He has served as a consultant for such organizations as the International Monetary Fund, the World Bank, and the Canadian government's Department of Finance.


“An estimate of the marginal cost of public funds (MCF) is critical for the correct evaluation of public projects and for conducting reviews of public expenditure. Estimates of the MCF for different taxes also provide a guide for tax reform by revealing which taxes cause the greatest welfare loss. The Marginal Cost of Public Funds explains the theory behind the MCF, details particular features of the MCF for a range of tax instruments, and most importantly shows how the theory is applied. The book is highly recommended as a text for students seeking an accessible presentation of the theory, and as a manual for applied economists who wish to ensure the employment of best-practice in project evaluation.”
Gareth D. Myles, Professor of Economics, University of Exeter, and Research Fellow, Institute for Fiscal Studies
“Dahlby's excellent new book will be very useful to all professional public finance economists, as well as graduate students and advanced seniors studying public finance. The marginal cost of public funds is central for understanding issues of tax and deficit policy, as well as benefit cost analysis, and Dahlby, an expert on the subject, has written a book that is clear, comprehensively researched, and important.”
Neil Bruce, Department of Economics, University of Washington
“The marginal cost of public funds is a central and unifying concept for tax analysis, and Bev Dahlby’s important new book provides the first comprehensive treatment of the topic. It carefully lays out the theoretical foundation of the concept, and then illustrates its policy relevance with a series of fascinating real-world applications in both developed and developing countries.”
Joel Slemrod, Paul W. McCracken Collegiate Professor of Business Economics and Public Policy, and Director, Office of Tax Policy Research, University of Michigan