The purpose of this book is to present the cost of capital approach to tax policy analysis. This is the first in a series of Lectures on Monetary and Fiscal Policy at Uppsala University to honor the memory of Erik Lindahl. One of the objectives of this series is to provide expositions of important techniques in monetary and fiscal policy analysis, like those exemplified in Lindahl's own contributions. To achieve this goal each technique will be presented in a form suitable for introducing the subject to graduate students and policy analysts.
It is worthwhile to emphasize the important points of contact between these inaugural Lindahl Lectures and the work of Erik Lindahl. The contributions of this great Swedish economist range from abstract theory, inspired by the Lausanne School of general equilibrium analysis, to the practical measurement of the national income of Sweden. His best known work in public finance is the often-cited Lindahl pricing scheme, which established the conceptual basis for decentralizing the allocation of public goods. Lindahl prices and the associated Lindahl equilibrium are concepts familiar to every public economist.
The first point of contact between the lectures and Lindahl's work is through his theory of capital. This theory employs the crucial simplification of modeling anticipations through the assumption of perfect foresight or 'rational expectations.' Lindahl's rationale for this assumption is worth repeating: 'The import of the assumption is, therefore, that individuals' ideas concerning the future are such that their actions bring about exactly the conditions which they anticipated."1 This idea is used in modeling anticipations of future prices of investment goods, beginning on page 6 of this book.____________________