Public finance
Erik Lindahl was the last Swedish economist to write his doctoral dissertation in German. With reference to Wicksell (1896) he proposed in Die Gerechtigkeit der Besteuerung (1919), translated as Just Taxation: A Positive Solution (1958), that citizens pay for the provision of a public good according to their marginal benefits.
Two of the most prominent twentieth-century authors in public finance based their contrary views on Wicksell’s and Lindahl’s works. Richard Musgrave, who was an emigre from Nazi Germany, used them in his 1937 Harvard PhD thesis, and made them known to the English-speaking world (Musgrave 1939). They were subsequently refined into what Samuelson (1987: 910) has described as the “Wicksell-Lindahl-Musgrave-Samuelson-Vickrey theory of pure public goods”. In a nutshell, it leads to the following proposition:When private goods consumed by a single person only are supplemented by a public good that is simultaneously enjoyed by many people, Pareto optimality requires that production of the public good be carried to a point where its marginal (opportunity) cost just equals the sum of all citizen’s marginal-rates-of substitution between the public good and any private good. (Ibid.)
Yet, Samuelson also added that “[r]elying on a hoped-for Scandinavian consensus or ‘unanimity’, Wicksell perhaps worried too little about the ‘free rider’ problem (that results from the fact that every citizen in a Lindahl market is tempted to pretend not to much want the public good)” (ibid.).
At the same time, Wicksell’s radical liberalism stimulated the development of public choice theory, as James Buchanan, the latter’s founder, has emphasized in his Nobel lecture of 1986 (Buchanan 1987). Buchanan has contributed a translation of Wicksell’s “new principle of taxation” to Musgrave’s and Peacock’s anthology of classics in the theory of public finance (1958). An English version of the “theory of tax incidence” was made available in Wicksell’s Selected Essays in Economics, edited by Bo Sandelin (Wicksell 1997: 57-115).