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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.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 203.

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Date of creation: 30 Jun 1989
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Handle: RePEc:wbk:wbrwps:203

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Keywords: Environmental Economics&Policies; Economic Theory&Research; Public Sector Economics&Finance; Commodities; Consumption;

References

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  1. Pollak, Robert A, 1969. "Conditional Demand Functions and Consumption Theory," The Quarterly Journal of Economics, MIT Press, vol. 83(1), pages 60-78, February.
  2. Ahmad, Ehtisham & Stern, Nicholas, 1984. "The theory of reform and indian indirect taxes," Journal of Public Economics, Elsevier, vol. 25(3), pages 259-298, December.
  3. Deaton, Angus, 1974. "A Reconsideration of the Empirical Implications of Additive Preferences," Economic Journal, Royal Economic Society, vol. 84(334), pages 338-48, June.
  4. M. L. Weitzman, 1974. "Is the Price System or Rationing More Effective in Getting a Commodity to Those Who Need It Most?," Working papers 140, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Ray, Ranjan, 1985. "A dynamic analysis of expenditure patterns in rural India," Journal of Development Economics, Elsevier, vol. 19(3), pages 283-297, December.
  6. Deaton, Angus & Stern, Nicholas, 1986. "Optimally uniform commodity taxes, taste differences and lump-sum grants," Economics Letters, Elsevier, vol. 20(3), pages 263-266.
  7. 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.
  8. Neary, J.P & Roberts, K.W.S, 1978. "The Theory of Household Behaviour under Rationing," The Warwick Economics Research Paper Series (TWERPS) 132, University of Warwick, Department of Economics.
  9. Ray, Ranjan, 1986. "Sensitivity of `optimal' commodity tax rates to alternative demand functional forms : An econometric case study of India," Journal of Public Economics, Elsevier, vol. 31(2), pages 253-268, November.
  10. Deaton, Angus, 1977. "Equity, efficiency, and the structure of indirect taxation," Journal of Public Economics, Elsevier, vol. 8(3), pages 299-312, December.
  11. Harris, Richard G. & Mackinnon, James G., 1979. "Computing optimal tax equilibria," Journal of Public Economics, Elsevier, vol. 11(2), pages 197-212, March.
  12. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
  13. Howard, David H, 1977. "Rationing, Quantity Constraints, and Consumption Theory," Econometrica, Econometric Society, vol. 45(2), pages 399-412, March.
  14. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
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