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Correcting Market Failure Due to Interdependent Preferences: When Is Piecemeal Policy Possible?

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Author Info
EMANUELA RANDON
PETER SIMMONS

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Abstract

Allowing for general utility interdependence and agent heterogeneity, we characterize taxes that will generate first best solutions in markets. We show the equivalence of tax corrections derived from the Marshallian and compensated demand approaches. Next we analyze the conditions that are required for the market failure to be corrected by: (1) specific indirect ad valorem taxes on commodities, (2) the same proportional tax rate on every commodity, and (3) a proportional income tax rate on each individual. The conditions are related to the restrictions necessary to have H synthetic consumers without externalities who replicate behavior of individuals with externalities. Copyright 2007 Blackwell Publishing, Inc..

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9779.2007.00334.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): 9 (2007)
Issue (Month): 5 (October)
Pages: 831-866
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Handle: RePEc:bla:jpbect:v:9:y:2007:i:5:p:831-866

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  1. Blackorby, Charles & Davidson, Russell & Schworm, William, 1991. "The validity of piecemeal second-best policy," Journal of Public Economics, Elsevier, vol. 46(3), pages 267-290, December. [Downloadable!] (restricted)
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  2. Jewitt, Ian, 1981. "Preference structure and piecemeal second best policy," Journal of Public Economics, Elsevier, vol. 16(2), pages 215-231, October. [Downloadable!] (restricted)
  3. Peter Kooreman & Lambert Schoonbeek, 2004. "Characterizing Pareto Improvements
    in an Interdependent Demand System    ," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 427-443, 08. [Downloadable!] (restricted)
  4. Tibor Scitovsky, 1954. "Two Concepts of External Economies," Journal of Political Economy, University of Chicago Press, vol. 62, pages 143. [Downloadable!] (restricted)
  5. Milleron, Jean-Claude, 1972. "Theory of value with public goods: A survey article," Journal of Economic Theory, Elsevier, vol. 5(3), pages 419-477, December. [Downloadable!] (restricted)
  6. Guoqiang Tian, 2004. "A Unique Informationally Efficient Allocation Mechanism In Economies With Consumption Externalities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 79-111, 02. [Downloadable!] (restricted)
  7. Kapteyn, Arie, et al, 1997. "Interdependent Preferences: An Econometric Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 665-86, Nov.-Dec.. [Downloadable!]
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  8. Pollak, Robert A, 1976. "Interdependent Preferences," American Economic Review, American Economic Association, vol. 66(3), pages 309-20, June.
  9. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju. [Downloadable!] (restricted)
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