How can the government finance the provision of public goods without causing excessive distortion?

• A. Use lump-sum taxes that do not distort prices.
• B. Use high-rate distortive taxes
• C. Use broad-based taxes with relatively small distortion or taxes that avoid distorting price signals; or use user fees when appropriate.
• D. Rely exclusively on private donations

Answer: (C)

Funding public goods with minimal distortion means choosing tax instruments that don’t significantly alter decisions in the economy or misprice resources. Taxes and fees affect incentives, so the goal is to raise revenue in a way that doesn’t heavily tilt choices about work, saving, or consumption.

Broad-based taxes that spread the burden across many people tend to distort prices and incentives less than targeted or high-rate taxes, especially when their overall effect on any one market is small. Pairing that with user fees for public goods when appropriate helps align the cost with those who directly benefit, reducing the distortion introduced by general taxes. This combination—taxes that keep price signals and incentives intact, plus user charges where suitable—best balances revenue needs with maintaining efficient resource allocation.