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Ramsey, Pigou, and a Consumption Externality

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  • Wendner, Ronald

Abstract

This paper analyzes the effects of consumption externalities on optimal taxation and on the social cost and optimal levels of public good provision. If public and private goods are Hicksian complements and no lump sum taxes are available, the second-best level of public good provision can exceed the first-best level. In contrast to economies without externalities, this result even holds for Cobb-Douglas economies with homogeneous agents. Heterogeneity of agents raises the second-best commodity tax rate due to equity considerations, but lowers the tax rate due to the concern for externality-correction.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21356.

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Date of creation: 12 Mar 2010
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Handle: RePEc:pra:mprapa:21356

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Keywords: consumption externality; public good provision; Ramsey rule; Pigou;

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Cited by:
  1. Aronsson, Thomas & Johansson-Stenman, Olof, 2010. "Veblen’s Theory of the Leisure Class Revisited: Implications for Optimal Income Taxation," Umeå Economic Studies 812, Umeå University, Department of Economics.

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