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An Optimal Quantity Tax Path in a Dynamic Setting

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  • Nawaz, Nasreen

Abstract

Following Ramsey, the existing literature on optimal quantity taxation only compares the pre and the post-tax market equilibriums in order to account for the efficiency losses. However, when the government imposes a quantity tax on the consumer, the buyer’s price jumps to the pre-tax equilibrium price plus the amount of the tax, and the supply and the demand of the taxed commodity then adjust over time to bring the new post-tax market equilibrium. The existing literature does not take into account the efficiency losses during the adjustment process while computing the optimal quantity taxes. This paper derives an optimal quantity tax path in a dynamic setting minimizing the efficiency losses (output and/ or consumption lost) during the dynamic adjustment process as well as the post-tax market equilibrium.

Suggested Citation

  • Nawaz, Nasreen, 2017. "An Optimal Quantity Tax Path in a Dynamic Setting," MPRA Paper 114275, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:114275
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    References listed on IDEAS

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    Cited by:

    1. Ahmed, Muhammad Ashfaq & Nawaz, Nasreen, 2023. "Adam Smith's Perfectly Competitive Market is Not Pareto Efficient: A Dynamic Perspective," MPRA Paper 118362, University Library of Munich, Germany.

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    More about this item

    Keywords

    Quantity tax; Dynamic efficiency; Adjustment Path; Equilibrium;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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