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Commodity Taxation

# Commodity Taxation

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12/16/2012

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P
UBLIC
E
CONOMICS

P
REAMBLE
1
st
Welfare Theorem:
Competitive Equilibrium is Pareto Efficient.
Vi
olated
i
f there
i
s not a compet
i
t
iv
e market, or there are external
i
t
i
es.
Correct
vi
a
Pigou taxation
(
eff
i
c
i
ency ga
i
ns
vi
a correct
iv
e taxat
i
on).
2
nd
Welfare Theorem:
A
ny Pareto Efficient equilibrium can be obtained by use of lump-sumtaxation + transfers.
I
f th
i
s
i
s not poss
ib
le, we use a second
b
est measure of d
i
stort
iv
e taxat
i
on oneconom
i
c act
ivi
ty, wh
i
ch ha
v
e equ
i
ty ga
i
ns
b
ut eff
i
c
i
ency losses.
Examples:
R
amsey Taxation
(
d
i
stort
iv
e commod
i
ty taxes),
Mirrlees Taxation
(
d
i
stort
iv
e la
b
our
i
ncome taxes).
P
ro
b
lem: How to set taxes to m
i
n
i
m
i
se the cost of ra
i
s
i
ng a set le
v
el of re
v
enue?
Adopt a SWF to represent state preferences, then max
i
m
i
se w
i
th respect to there
v
enue constra
i
nt

C
OMMODITY
T
AXATION
:R
EPRESENTATIVE
H
OUSEHOLD
Assumpt
i
ons of the Ramsey Taxat
i
on Model:
Prices:
P
re-tax producer pr
i
ces:
p
i
=L
i
.w
Assume pre-tax pr
i
ces are f
i
xed, wage rate
i
s f
i
xed,and there are n commod
i
t
i
es.
Consumer pr
i
ce
i
s
q
i
= p
i
+ t
i
Individual Preferences (see equations):
S
i
ngle household model.
Ut
i
l
i
ty funct
i
on
i
s a funct
i
on of a consumpt
i
on
v
ector x and la
b
our supply: u
(
x,L)
Su
bj
ect to the
b
udget constra
i
nt
(
w
i
th
I
as lump-sum
i
ncome).
When sol
v
ed, can get an
indirect utility functionv(q , w, I).
G
enerally assume
I=0
.
N
o redistribution (utility a function of onesconsumption only).
wqqxx wqqxx xqwLLx wLxqxqxqs LxxxLx
nnniiniiiLxniiinn niLx
,,,,, ,,,...,,:max:.,,,,,:max
1**11*1,,1111,
--N---
§§
!!
P
P
ii
Lwp
!
iii
p
q
!