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Moral Hazard and Optimal Commodity Taxation

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Author Info
Richard Arnott
Joseph Stiglitz

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Abstract

The central result of this paper is that when moral hazard is present, shadow prices in general differ from market prices. To remedy this market failure, the government should introduce differential commodity taxation. Moral hazard causes people to take too little care to prevent accidents. The corresponding deadweight loss can be reduced by subsidizing (taxing) those goods the consumption of which encourages (discourages) accident avoidance. At the constrained optimum, the sum of the deadweight losses and differential commodity taxation is minimized. Policy implications are derived and discussed.

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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 500.

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Length: 47
Date of creation: 1982
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Handle: RePEc:qed:wpaper:500

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