Demand Estimation for Public Goods: Distortionary Taxation and Other Sources of Bias
David E. Wildasin Department of Economics Indiana University
Sources of error in the estimation of demand for public goods are reviewed and summarized, and a new type of bias is identified and analyzed. This new bias arises when public goods are financed by distortionary taxation, instead of by distortionless taxes as is usually assumed. It is shown that failure to take account of tax distortions leads to a misspecification of the effective price of public goods, which biases the estimates of the price and income elasticities of demand. Sample calculations are presented in order to illustrate the potential magnitude of the errors involved.