Measurement of the social loss of wrong public budget allocation

Abstract

PurposeThe purpose of this paper is to measure the social loss occurring due to the inability of the government to use the real public demand function.Design/methodology/approachThe authors developed a model that enables maximization of the public utility of a given public budget by maximizing total consumer surplus, and presented a method for calculating the social loss due to the inability to use the real public demand function.FindingsThe social loss occurring due to the inability of the government to use the real public demand curve was shown.Research limitations/implicationsIn reality, it is impossible to get the proper evaluation of social utility function. Instead, the authors assumed a given public demand for each public good.Practical implicationsThe paper presents a way to measure overtime social loss as a function of the sum of overtime government expenses, the coefficient of variation of the public good supply and the elasticity of demand of the average demand curve.Social implicationsImproving the allocation of public budget.Originality/valueGiven the demand curve for each public good, this paper presents a technique for the optimal allocation of a given budget in order to maximize aggregate consumer surplus.