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Pareto Improving Taxes

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    Abstract

    We show that in almost every economy with separable externalities, every competitive equilibrium can be Pareto improved by a package of anonymous commodity taxes that causes prices to adjust and markets to reclear at different levels of individual consumption. This constrained suboptimality of competitive allocations might provide a rationale for economic policy in economies with externalities. It shows that policy makers should look for good tax packages that help everybody, rather than thinking taxes must inevitably be bad for some lobby that will oppose them.

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    File URL: http://cowles.econ.yale.edu/P/cd/d16b/d1662.pdf
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    Bibliographic Info

    Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1662.

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    Length: 28 pages
    Date of creation: May 2008
    Date of revision:
    Publication status: Published in Journal of Mathematical Economics (2008), 44: 682-696
    Handle: RePEc:cwl:cwldpp:1662

    Note: CFP 1235.
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    Related research

    Keywords: Externalities; Commodity taxes; Constrained suboptimality;

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    References

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    1. Andrés Carvajal, . "Testable Restrictions of General Equilibrium Theory in Exchange Economies with Externalities," Borradores de Economia 231, Banco de la Republica de Colombia.
    2. DEBREU, Gérard, . "Economies with a finite set of equilibria," CORE Discussion Papers RP -67, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. P. A. Diamond, 1975. "A Many-Person Ramsey Tax Rule," Working papers 146, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Debreu, Gerard, 1972. "Smooth Preferences," Econometrica, Econometric Society, vol. 40(4), pages 603-15, July.
    5. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer, vol. 11(3), pages 495-521.
    6. CITANNA, Alessandro & POLEMARCHAKIS, Heracles M. & TIRELLI, M., 2000. "The Taxation of Trades in assets," Les Cahiers de Recherche 721, HEC Paris.
    7. Kenneth Arrow, 1970. "Political and Economic Evaluation of Social Effects and Externalities," NBER Chapters, in: The Analysis of Public Output, pages 1-30 National Bureau of Economic Research, Inc.
    8. Debreu, Gerard, 1976. "Smooth Preferences: A Corrigendum," Econometrica, Econometric Society, vol. 44(4), pages 831-32, July.
    9. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
    10. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
    11. Hurwicz, Leonid, 1979. "On allocations attainable through Nash equilibria," Journal of Economic Theory, Elsevier, vol. 21(1), pages 140-165, August.
    12. Guesnerie, Roger, 1977. "On the direction of tax reform," Journal of Public Economics, Elsevier, vol. 7(2), pages 179-202, April.
    13. Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 241-61, April.
    14. Hurwicz, Leonid, 1973. "The Design of Mechanisms for Resource Allocation," American Economic Review, American Economic Association, vol. 63(2), pages 1-30, May.
    15. repec:fth:louvco:2000/24 is not listed on IDEAS
    16. Geanakoplos, J. D. & Polemarchakis, H. M., 1990. "Observability and optimality," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 153-165.
    17. Herakles Polemarchakis, 2001. "The taxation of trades in assests," Working Papers 2001-21, Brown University, Department of Economics.
    18. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    19. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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    Citations

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    Cited by:
    1. Alberto Bisin & John Geanakoplos & Piero Gottardi & Enrico Minelli & Heracles Polemarchakis, 2009. "Markets and Contracts," Working Papers 0915, University of Brescia, Department of Economics.
    2. Gaël Giraud & Cécile Renouard, 2011. "In search of an alternative to shareholder value maximization," Documents de travail du Centre d'Economie de la Sorbonne 11038, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Giraud, Gaël & Renouard, Cécile, 2011. "In search of an alternative to shareholder value maximization," ESSEC Working Papers WP1108, ESSEC Research Center, ESSEC Business School.
    4. Gaël Giraud & Cécile Renouard, 2011. "In search of an alternative to shareholder value maximization," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00611712, HAL.
    5. Jean-Marc Bonnisseau & Elena L. Del Mercato, 2008. "Externalities, consumption constraints and regular economies," Documents de travail du Centre d'Economie de la Sorbonne b08011, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Apr 2009.
    6. Jean-Marc Bonnisseau & Elena L. Del Mercato, 2008. "Externalities, consumption constraints and regular economies," Post-Print halshs-00257731, HAL.
    7. repec:hal:journl:halshs-00611712 is not listed on IDEAS
    8. Guo, Xiaolei & Yang, Hai, 2010. "Pareto-improving congestion pricing and revenue refunding with multiple user classes," Transportation Research Part B: Methodological, Elsevier, vol. 44(8-9), pages 972-982, September.
    9. Gaël Giraud & Cécile Renouard, 2011. "In search of an alternative to shareholder value maximization," Post-Print hal-00609153, HAL.
    10. Sen, Debapriya & Stamatopoulos, Giorgos, 2013. "Decreasing returns, patent licensing and price-reducing taxes," MPRA Paper 46246, University Library of Munich, Germany.

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