AHEORY of public finance remains unsatisfactory unless it comprises both the revenue and expenditure sides of the fiscal process. The classical (RicardoMills-Edgeworth-Pigou) tradition of a taxation-only view neglected this axiom. Holding expenditures unproductive, or disregarding them altogether, the task was to arrange taxes so as to impose equal (or least total) sacrifice. As a theory of taxation, this approach collapsed with the old welfare economics; and as a theory of public finance, its exclusive concern with taxation bypassed the central problem of how to allocate resources for the provision of social goods. Subsequently, various attempts were made to combine the revenue and expenditure sides in a more satisfactory system. We shall note these briefly, and then consider how cost-benefit analysis fits into the picture.

occurs in the context of the HochmanRodgers scheme is a function of a) people's rate of substitution between the satisfaction derived from retaining income and that derived from giving it, and b) the distribution of earnings which exists before giving occurs. Whatever the values of a), the outcome will differ depending on b). Such, at least, will be the case unless everybody's rate of substitution is such that complete equality results. Pareto optimal redistribution thus constitutes a secondary redistribution which depends on the initial distribu