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Externality Policy Reform: A General Equilibrium Analysis

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  • SUSHAMA MURTY
  • R. ROBERT RUSSELL

Abstract

We characterize Pareto-improving and equilibrium-preserving policy reforms in a second-best (Diamond/Mirrlees) world with a consumption externality. A counterintuitive finding is that, starting from an initial equilibrium with no direct quantity control on the externality, it is possible that all Pareto-improving and equilibrium-preserving directions of change require an increase in a negative externality. We provide intuition for these results by establishing a nexus between Guesnerie's approach to designing (tax) policy reforms and the standard Kuhn-Tucker technique for identifying the manifold of feasible Pareto-optimal states, given the instruments available to the policy maker. Copyright 2005 Blackwell Publishing Inc..

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Bibliographic Info

Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 7 (2005)
Issue (Month): 1 (02)
Pages: 117-150

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Handle: RePEc:bla:jpbect:v:7:y:2005:i:1:p:117-150

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Cited by:
  1. Alan Krause, 2007. "A Tax Reform Analysis of the Laffer Argument," Discussion Papers, Department of Economics, University of York 07/10, Department of Economics, University of York.
  2. Alan Krause, 2012. "Nonlinear Income Tax Reforms," Discussion Papers, Department of Economics, University of York 12/03, Department of Economics, University of York.
  3. Alan Krause, 2004. "The Dynamic Process of Tax Reform," Econometric Society 2004 Australasian Meetings, Econometric Society 119, Econometric Society.
  4. Sushama Murty & R. Robert Russell & Steven B. Levkoff, 2011. "On modeling pollution-generating technologies," Discussion Papers, Exeter University, Department of Economics 1101, Exeter University, Department of Economics.
  5. Alan Krause, 2009. "A general equilibrium analysis of the Laffer argument," Social Choice and Welfare, Springer, Springer, vol. 33(4), pages 601-615, November.

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