Optimal Commodity Taxation

Chris Jones

in Applied Welfare Economics

Published in print May 2005 | ISBN: 9780199281978
Published online July 2005 | e-ISBN: 9780191602535 | DOI:
Optimal Commodity Taxation

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Rules for setting Ramsey (1927) optimal commodity taxes are derived in this chapter using the conventional welfare analysis presented in Ch. 6. When these tax rules apply, Diamond and Mirrlees (1971) and Stiglitz and Dasgupta (1971) prove that the producer prices can be used as shadow prices in project evaluation if private profits are eliminated from consumer incomes. This result is demonstrated using shadow prices to value the changes in economic activity from a marginal tax change. It provides economic intuition that can be used, together with the generalized Hatta decomposition, to extend a number of the familiar optimal tax rules to economies with variable prices.

Keywords: Corlett–Hague rule; inverse-elasticity rule; Ramsey optimal taxes; shadow consumer taxes; shadow producer taxes

Chapter.  9931 words.  Illustrated.

Subjects: Public Economics

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