Marginal cost of public funds

The marginal cost of public funds (MCF) is a concept in public finance which measures the loss incurred by society in raising less revenues to finance government spending due to the distortion of resource allocation caused by taxation.^[1] Formally, it is defined as the ratio of the marginal value of a monetary unit raised by the government and the value of that marginal private monetary unit. The applications of the marginal cost of public funds include the Samuelson condition for the optimal provision of public goods and the optimal corrective taxation of externalities in public economic theory, the determination of tax-smoothing policy rules in normative public debt analysis and social cost-benefit analysis common in practical policy analysis.