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Optimal commodity taxes under rationing

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  • Kakwani, Nanak
  • Ray, Ranjan

Abstract

How useful and relevant are the results of standard optimal commodity tax models when one or more commodities are rationed? This paper investigates the implications of optimal commodity taxation under rationing. In a single person economy, optimal policy dictates that the rationed commodity bears the entire tax. The implication for developing countries is that if the government has a fixed budget to subsidize certain commodities, optimal policy will be to subsidize only the rationed commodities. In a multi person economy, optimal policy will tax all nonrationed commodities at an infinite rate if the rule is that taxes on all commodities are proportional to prices. The more a society is concerned about inequality, the greater the tax should be on nonrationed commodities. The alternative model presented here overcomes some of the restrictive features of the previous rationing model.

Suggested Citation

  • Kakwani, Nanak & Ray, Ranjan, 1989. "Optimal commodity taxes under rationing," Policy Research Working Paper Series 203, The World Bank.
    • Handle: RePEc:wbk:wbrwps:203
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    References listed on IDEAS

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