The commodities one chooses to consume serve as visible signals of identity. With increased affluence, more economic resources are required to confirm one's identity as a "normal, respectable member of the society." We argue that this induces formal structures similar to preferences for high relative consumption. This increased cost of confirming identity occurs if increased national income is used for private consumption. This is not the case, however, if increased national income is used to finance more public goods, since this does not increase the cost of confirming identity. Thus we argue that when we take the symbolic meaning of commodities into account, the social optimal level of public (and environmental) goods increases. Moreover, general income or consumption taxes may then be efficiency enhancing. This contrasts with the traditional estimates of marginal cost of funds, where the efficiency loss of taxation is added to the cost of providing public goods. Paper prepared as background paper for the World Development Report
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