Advanced Search
MyIDEAS: Login to save this paper or follow this series

Atkinson-Stiglitz and Ramsey Reconciled: Pareto Efficient Taxation and Pricing under a Break-Even Constraint

Contents:

Author Info

  • Helmuth Cremer
  • Firouz Gahvari

Abstract

The Ramsey tax problem examines the design of linear commodity taxes to collect a given tax revenue. This approach has been seriously challenged by Atkinson and Stiglitz (1976) who show that (under some conditions) an optimal income tax makes commodity taxes redundant. In the meantime, the Ramsey setting has had a second life as model of regulatory pricing. Boiteux (1956) studies linear pricing of a regulated multi-product monopoly that has to cover some "fixed cost" through markups on the different products (equivalent to taxes). While the scope of regulation has declined, Ramsey-Boiteux pricing continues to play an important role. This paper examines if the optimal tax and regulatory pricing approaches to Ramsey pricing can be reconciled. We incorporate the two objectives of revenue raising for financing the government's expenditures and a regulated firm's fixed cost into a single framework. The first major lesson is that the existence of a break-even constraint not only requires taxation of goods produced by the regulated firm, but also the taxation of other goods. Next, we consider the cases of independent Hicksian and Marshallian demand curves. In both the Ramsey solution imply so-called inverse elasticity rules. In the separable Hicksian demand case, the private goods (not included in the break-even constraint) continue to go untaxed as in the Atkinson and Stiglitz setting. In the case where Marshallian demands are independent, the effect of the break-even constraint spills over to the other goods which no longer go untaxed. We continue to get inverse elasticity rules; however, there is no covariance (or similar) term that captures redistributive considerations. Finally, we study the most celebrated general result obtained in the Ramsey model; namely, the (un)equal proportional reduction in compensated demands property. We find that the redistributive considerations are once again replaced by tax revenue terms.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-05/cesifo1_wp4248.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4248.

as in new window
Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:ces:ceswps:_4248

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: Atkinson-Stiglitz theorem; Ramsey; Pareto efficient taxation; break-even constraint;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Cremer, H. & Gahvari, F., 1996. "On Optimal Taxation of Housing," Papers, Toulouse - GREMAQ 96.417, Toulouse - GREMAQ.
  2. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, American Economic Association, vol. 60(3), pages 265-83, June.
  3. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, Elsevier, vol. 6(1-2), pages 37-54.
  4. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, Elsevier, vol. 4(4), pages 335-342, November.
  5. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Optimal Bypass and Cream Skimming," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1042-61, December.
  6. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, Elsevier, vol. 24(2), pages 195-220, July.
  7. Ware, Roger & Winter, Ralph A., 1986. "Public pricing under imperfect competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 4(1), pages 87-97, March.
  8. Cremer, Helmuth & Gahvari, Firouz, 2002. " Nonlinear Pricing, Redistribution, and Optimal Tax Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(2), pages 139-61.
  9. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 70(3), pages 343-364, December.
  10. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(432), pages 1165-79, September.
  11. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 6(1-2), pages 55-75.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_4248. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.