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Externality Policy Reform: A General Equilibrium Analysis

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Author Info
SUSHAMA MURTY
R. ROBERT RUSSELL

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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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9779.2005.00197.x
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Publisher 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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  1. Alan Krause, 2004. "The Dynamic Process of Tax Reform," Econometric Society 2004 Australasian Meetings 119, Econometric Society. [Downloadable!]
  2. Alan Krause, 2007. "A Tax Reform Analysis of the Laffer Argument," Discussion Papers 07/10, Department of Economics, University of York. [Downloadable!]
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This page was last updated on 2009-11-22.

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