Overview

Diamond–Mirrlees production efficiency lemma


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A result stating that in a competitive economy with constant returns to scale (or decreasing returns to scale and a 100 percent tax on profits) commodity taxation should not distort the input choices of firms. The policy implication of the lemma is that commodity taxes should be levied on final consumption goods and not on inputs to production. This lemma justifies the use of a value-added tax system in which producers can reclaim the tax paid on inputs.

Subjects: Economics.


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