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Pareto Improving Taxes

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Author Info
John Geanakoplos () (Cowles Foundation, Yale University)
H. M. Polemarchakis (Dept. of Economics, University of Warwick)
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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Publisher Info
Paper provided by Cowles Foundation, 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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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Externalities; Commodity taxes; Constrained suboptimality;

Find related papers by JEL classification:
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
D60 - Microeconomics - - Welfare Economics - - - General
D62 - Microeconomics - - Welfare Economics - - - Externalities
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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References listed on IDEAS
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  1. Peter A. Diamond, 1973. "Consumption Externalities and Imperfect Corrective Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 526-538, Autumn. [Downloadable!] (restricted)
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    Other versions:
  3. 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. [Downloadable!]
  4. Hurwicz, Leonid, 1973. "The Design of Mechanisms for Resource Allocation," American Economic Review, American Economic Association, vol. 63(2), pages 1-30, May.
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  7. Debreu, Gerard, 1970. "Economies with a Finite Set of Equilibria," Econometrica, Econometric Society, vol. 38(3), pages 387-92, May. [Downloadable!] (restricted)
  8. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November. [Downloadable!] (restricted)
    Other versions:
  9. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  10. Guesnerie, Roger, 1977. "On the direction of tax reform," Journal of Public Economics, Elsevier, vol. 7(2), pages 179-202, April. [Downloadable!] (restricted)
    Other versions:
  11. 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. [Downloadable!] (restricted)
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  13. Geanakoplos, J. D. & Polemarchakis, H. M., 1990. "Observability and optimality," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 153-165. [Downloadable!] (restricted)
  14. Citanna, A. & Polemarchakis, H.M. & Tirelli, M., 2006. "The taxation of trades in assets," Journal of Economic Theory, Elsevier, vol. 126(1), pages 299-313, January. [Downloadable!] (restricted)
    Other versions:
  15. Debreu, Gerard, 1972. "Smooth Preferences," Econometrica, Econometric Society, vol. 40(4), pages 603-15, July. [Downloadable!] (restricted)
  16. Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 49(2), pages 241-61, April. [Downloadable!] (restricted)
  17. Herakles Polemarchakis, 2001. "The taxation of trades in assests," Working Papers 2001-21, Brown University, Department of Economics. [Downloadable!]
  18. 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. [Downloadable!] (restricted)
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