This paper derives the optimal commodity tax formula and the tax reform rule that should be used in a situation of (orthodox Keynesian) unemployment. The setting considered is a four-good, one-individual model with fixed real wage implying an excess supply of labor. The presentation is very simple and based on intuitive and graphical arguments. The emphasis is on comparing the authors' results with the more traditional results derived under full employment. Copyright 1989 by The editors of the Scandinavian Journal of Economics.
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