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Asymmetric and Non-atmospheric Consumption Externalities, and Efficient Consumption Taxation

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  • Paul Eckerstorfer

    ()
    (University of Linz)

  • Ronald Wendner

    ()
    ( Karl-Franzens University of Graz)

Abstract

We analyze the effects of a generalized class of negative consumption externalities (asymmetric and non-atmospheric) on the structure of efficient commodity tax programs. Households are not only concerned about consumption reference levels - that is, they gain utility from "keeping up with the Joneses" - they also exhibit altruism. Two sets of efficient tax regimes are compared, based, on a welfarist- and a non-welfarist optimality criterion, respectively. Altruism turns out not to be at odds with the consumption externalities. Rather, altruism implicates a bound on efficient utility allocations. A non-welfarist government tolerates less inequality than a welfarist one. In the welfarist (non-welfarist) case, first-best personalized commodity tax rates respond highly sensitively (barely) to whether or not a consumption externality is asymmetric or non-atmospheric. If personalized commodity tax rates are not available (second-best case), the tax rate on a non-positional good is typically different from zero for corrective reasons. For plausible functional forms and parameter values, numerical simulations suggest that second-best tax rates are rather insensitive with respect to both the optimality criterion and the "nature" of the consumption externality.

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Paper provided by University of Graz, Department of Economics in its series Graz Economics Papers with number 2013-01.

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Date of creation: Jan 2013
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Handle: RePEc:grz:wpaper:2013-01

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Keywords: Consumption externality; Keeping up with the Joneses; Optimal (commodity) taxation; Genuine altruism; non-welfarist government;

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