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Optimum Commodity Taxation in Pooling Equilibria

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Author Info
Eytan Sheshinski ()

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Abstract

This paper extends the standard model of optimum commodity taxation (Ramsey (1927) and Diamond-Mirrlees (1971)) to a competitive economy in which some markets are inefficient due to asymmetric information. As in most insurance markets, consumers impose varying costs on suppliers but …firms cannot associate costs to customers and consequently all are charged equal prices. In a competitive pooling equilibrium, the price of each good is equal to average marginal costs weighted by equilibrium quantities. We derive modi…ed Ramsey-Boiteux Conditions for optimum taxes in such an economy and show that they include general-equilibrium effects which re‡flect the initial deviations of producer prices from marginal costs, and the response of equilibrium prices to the taxes levied. It is shown that condition on the monotonicity of demand elasticities enables to sign the deviations from the standard formula. The general analysis is applied to the optimum taxation of annuities and life insurance.

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Publisher Info
Paper provided by Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp429.

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Length: 18 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:huj:dispap:dp429

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Related research
Keywords: Asymmetric Information; Pooling Equilibrium; Ramsey-Boiteux Conditions; Annuities;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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  1. Lau, Lawrence J & Sheshinski, Eytan & Stiglitz, Joseph E, 1978. "Efficiency in the Optimum Supply of Public Goods," Econometrica, Econometric Society, vol. 46(2), pages 269-84, March. [Downloadable!] (restricted)
  2. Myles, Gareth D., 1989. "Ramsey tax rules for economies with imperfect competition," Journal of Public Economics, Elsevier, vol. 38(1), pages 95-115, February. [Downloadable!] (restricted)
  3. Stiglitz, Joseph E & Dasgupta, P, 1971. "Differential Taxation, Public Goods and Economic Efficiency," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 151-74, April. [Downloadable!] (restricted)
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  4. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June. [Downloadable!] (restricted)
  5. Guesnerie Roger & Laffont Jean-jacques, 1978. "Taxing price makers," CEPREMAP Working Papers (Couverture Orange) 7806, CEPREMAP.
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  6. Alan J. Auerbach & James R. Hines Jr., 2001. "Perfect Taxation with Imperfect Competition," NBER Working Papers 8138, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Myles, G. D., 1987. "Tax design in the presence of imperfect competition : An example," Journal of Public Economics, Elsevier, vol. 34(3), pages 367-378, December. [Downloadable!] (restricted)
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