Abstract
A small open economy model is developed to measure the waste of the whole economy when levels of public goods are determined by the government. The Allais–Debreu–Diewert measure of waste is defined and its second order approximation is calculated. This measure utilizes the second order substitution matrices of the restricted profit function and the restricted expenditure function evaluated at an equilibrium. Finally, simple examples and diagrams are utilized to clarify the economic implications of our approach.
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