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Public Investment

This section can be deleted; but there may be some material that should be used elsewhere in the public accounts

Consumption

The flow of services from public capital is a component of total public consumption. In theory, the flow of services is equal to depreciation plus the net return from public capital, 

     CGK(a,t) = (r + \delta)K(a,t)

     CGK(a,t) - consumption of government capital by age group a in year t
     r - rate of return to government capital
     \delta - depreciation rate

In practice, National Income and Product Accounts assume that the net rate of return to public capital is zero. If this practice is followed, r is equal to zero and consumption is equal to depreciation.

Transfers

The age profile of taxpayers who finance public investment is different than the age profile of the beneficiaries of that investment. The beneficiaries are by assumption the "owners" of the capital. Thus, investment in public capital is accompanied by transfers from taxpayers to beneficiaries in essentially the same way as other public programs.

The transfer inflows are equal to the gross investment by each age group while the transfer outflows are equal to taxes paid for that investment; net transfers are the difference between inflows and outflows: 

     TKGI(a,t) = IG(a,t) + \delta KG(a,t)
     TKGO(a,t) = - \theta(a,t)(IG(t) + \delta KG(t))
     TKG(a,t) = TKGI(a,t) + TKGO(a,t)

     where \theta(a,t) - tax share of age group a

Additional details are available in Public Sector 

Author:  A Mason
Last Revised:  August 10, 2005

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