TY - JOUR
T1 - Optimum commodity taxation in pooling equilibria
AU - Sheshinski, Eytan
PY - 2007/8
Y1 - 2007/8
N2 - This paper extends the standard model of optimum commodity taxation (Ramsey, F., 1927. A Contribution to the Theory of Taxation. Economic Journal 37, 47-61; Diamond, P., Mirrlees, J., 1971. Optimal Taxation and Public Production, II: "Tax Rules". American Economic Review 61, 261-278) to a competitive economy in which markets are inefficient due to asymmetric information. Insurance markets are prime examples: consumers impose varying costs on suppliers but firms cannot associate costs with individual customers and consequently all are charged equal prices. In such a competitive pooling equilibrium, the price of each good is equal to the average of individual marginal costs weighted by equilibrium quantities. We derive modified Ramsey-Boiteux Conditions for optimum taxes in such an economy and show that, in addition to the standard formula, they include first-order effects which reflect the deviations of prices from marginal costs and the response of equilibrium quantities to the taxes levied. An explanation of the additional terms is provided. It is shown that a condition on the monotonicity of demand elasticities enables to sign the direction of the deviations from the standard case.
AB - This paper extends the standard model of optimum commodity taxation (Ramsey, F., 1927. A Contribution to the Theory of Taxation. Economic Journal 37, 47-61; Diamond, P., Mirrlees, J., 1971. Optimal Taxation and Public Production, II: "Tax Rules". American Economic Review 61, 261-278) to a competitive economy in which markets are inefficient due to asymmetric information. Insurance markets are prime examples: consumers impose varying costs on suppliers but firms cannot associate costs with individual customers and consequently all are charged equal prices. In such a competitive pooling equilibrium, the price of each good is equal to the average of individual marginal costs weighted by equilibrium quantities. We derive modified Ramsey-Boiteux Conditions for optimum taxes in such an economy and show that, in addition to the standard formula, they include first-order effects which reflect the deviations of prices from marginal costs and the response of equilibrium quantities to the taxes levied. An explanation of the additional terms is provided. It is shown that a condition on the monotonicity of demand elasticities enables to sign the direction of the deviations from the standard case.
KW - Annuities
KW - Asymmetric information
KW - Pooling equilibrium
KW - Ramsey-Boiteux Conditions
UR - http://www.scopus.com/inward/record.url?scp=34249705343&partnerID=8YFLogxK
U2 - 10.1016/j.jpubeco.2007.03.008
DO - 10.1016/j.jpubeco.2007.03.008
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AN - SCOPUS:34249705343
SN - 0047-2727
VL - 91
SP - 1565
EP - 1573
JO - Journal of Public Economics
JF - Journal of Public Economics
IS - 7-8
ER -