Assume the following: Society faces a marginal excess tax burden of raising public revenue equal to METB; the shadow price of capital equals θ; public borrowing displaces private investment dollar for dollar; and public revenues raised through taxes displace consumption (but not investment). Consider a public project involving a large initial capital expenditure, C, followed by a stream of benefits that are entirely consumed, B.
a. Discuss how you would apply the shadow price of capital method to the project if it is financed fully out of current taxes.
b. Discuss how you would apply the shadow price of capital method to the project if it is financed fully by public borrowing, which is later repaid by taxes.