_Policy, Planning, and Research Working Paper Series_ 63

## economic cost of depreciation.

For another, the tax benefit of nominal interest deductions associated with debt financing of capital are of no value to the firm during the holiday - whereas after the holiday they may be quite beneficial.

After estimating the effective tax rates on capital for holiday and post-holiday investments, the author concludes that for some countries the effective tax rate on long-term capital is highter during the holiday than after.

This paper is a product of the Public Economics Division, Country Economics Department. Please contact Ann Bhalla, room N1O-061, extension 60359.

# 179. Public Sector Pricing in **a** Fiscal Context

## Christopher Heady

_If administered prices are to generate revenues, they should deviate from marginal cost and should be determined on the basis of their economy-wide effects, without regard to financial targets. It is better to raise prices above marginal cost through taxes than by raising the price received by the enterprise._ Administered prices should deviate from marginal cost if they are to be used as instruments to generate revenue.

The analysis is based on the Bank's two-step approach to public sector pricing: first calculating marginal cost, and then adjusting it to account for other factors. The aim istoshowhow those adjustments should be made to account for fiscal concerns. Such adjustments are not widely used at present.

The appropriate basis for pricing in the first step, the author contends, is a weighted average of short and long-term marginal costs.

Deviations from marginal cost in the second step are shown to depend on their revenue-raising, distortionary, and distributional effects.

Imposing financial constraints may be an inefricient method of achieving fiscal objectives. It is better to decide prices on the basis of their economy-wide effects without regard to financial targets - and then, if necessary, to impose financial targets that are consistent with those prices.

The author argues that it is better to raise prices above marginal cost through taxes thanby raising the price receivedby the enterprise.

Meteringproblemspreventdirectobservation of the use of publicly produced - goods a problem that particularly affects road user chargers. The author discusses how to set charges in the face of metering difficulties, stressing the need to set uniform charges and to make indirect charges on inputs. This paper is a product of the Public Economics Division, Country Economics Department. Please contact Ann Bhalla, room N10-061, extension 60359 (55 pages).

# 180. Structural **Changes** In **Metals** Consumption

# Boum-Jong Choe

_An extended model of metals demand suggests that the downturn in the intensity ofmetals consumption during the last 15 years can be explained largely by changes in input variables, including capital and energy, rather than by changes in the structure of demand._ For 15 years the metals market has been characterized by slow growth - in some - cases, even decline in consumption.

To test the proposition that structural changes in demand were the main cause of the slowdown, the author - drawingon U.S. data-used an extended metals demand model that recognizes energy, labor, capital, and other materials as major inputs.

The traditional model explains metal consumption in terms only of output and the prices of metal and its substitutes. It is inadequate to address the issue of structural change because it ignores other important factors of production, such as energy, which have experienced dramatic changes.

With the extended model, the null hypothesis ofno structural change cannot be rejected for most metals. With the conventional model, the null hypothesis of no structural change is strongly rejected.

Results with the extended model show that the downturn can be explained mostly by changes in the input variables, particularly such nonmetal inputs as capital and energy, which are much more important cost items than metals and have undergone drastic changes over the period.

This paper is a product of the International Commodity Markets Division, International Economics Department. Please contact Sarah Lipscomb, room S7062, extension 33718 (25 pages with charts and tables).

# 181. Public Finance, Trade, and Development: **What** Have **We** Learned?

## Johannes F. Linn and Deborah L. Wetzel

_Failure to consider explicitly the many intricate relations between trade and public finance policies will often lead to inconsistent and unsustainable policies, thus hindering a country's trade and development prospects._ The interdependence of trade and public finance policy are important considerations in designing macroeconomic policy, public revenue policy, and public expenditure policy. For example: _*_ A competitive real exchange rate, improved trade performance, and trade liberalization are all built on the base of sound fiscal management. Trade policies and trade liberalization may, however, have a negative effect on fiscal balances, which must be considered and compensated for.

* Improving competitiveness and reducing protection is likely to involve reform of both trade tariffs and domestic taxation. Greater reliance on efficiently designed usercharges will alsohelpmake a country more competitive internationally

* Correct priorities should be set for - public expenditures whether they are - rising or falling to ensure that they are supportive of trade and of tradable goods production.

This paperisa productofthe Office of the Vice President, Development Economics. Please contact Maureen Colinet, room S9-029, extension 33490 (28 pages with tables).

# 182. Latin America's **Experienc** with **Export Subsidies**

Julio Nogu6s _The failure of export subsidies, particularly in Argentina, should remind us to distinguish what is_ possible fom _what is_ likely. In _Latin America the money would be better spent on infrastructure, health,_