Department of Economics and Business Economics

Baumol's Cost Disease and the Sustainability of the Welfare State

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DOI

  • Torben M. Andersen
  • Claus T. Kreiner, Univ Copenhagen, University of Copenhagen, Ctr Epigenet

If productivity increases more slowly for services than for manufactured goods, then services suffer from Baumol's cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure that seems to leave policymakers with a trilemma: increase tax distortions, cut spending or redistribute less. Under the assumptions underlying Baumol's cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable, and there is even scope for Pareto improvements under Baumol's cost disease.

Original languageEnglish
JournalEconomica
Volume84
Issue335
Pages (from-to)417-429
Number of pages13
ISSN0013-0427
DOIs
Publication statusPublished - Jul 2017

    Research areas

  • PUBLIC-GOODS, HEALTH-CARE, TAX, PROVISION, PROJECTS, TAXATION, CRISIS, GROWTH, MODEL

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