The Opportunity Cost of Public Funds: Concepts and Issues

This paper reviews the main conceptual issues regarding the notion of Opportunity Cost of Public Funds (OCPF) and its use in normative economics. Despite the importance of the mechanisms it illustrates, the OCPF still has received too marginal attention in public economics literature and is often handled with some definitional ambiguity. Our review indicates that the core of the notion lies in the deadweight loss and, to a minor extent, in administrative costs, while other aspects like crowding out are more controversial. Moreover, we argue that the financing mechanisms of the public expenditures should be considered for a proper analysis and quantification of OCPF and suggest that public expenditures are generally financed through the displacement of funds from alternative uses. We conclude with a review of available quantifications