Reassessing the Diamond/Mirrlees Efficiency Theorem
AbstractMarch 2000 Diamond and Mirrlees (1971) provide sufficient conditions for a second-best Pareto efficient allocation with linear commodity taxation to require efficient production when a finite set of consumers have continuous single-valued demand functions. This paper considers a continuum economy allowing indivisible goods, other individual non-convexities, and some forms of non-linear pricing for consumers. Provided consumers have appropriately monotone preferences and dispersed characteristics, robust sufficient conditions ensure that a strictly Pareto superior incentive compatible allocation with efficient production results when a suitable expansion of each consumer's budget constraint accompanies any reform which enhances production efficiency. Appropriate cost-benefit tests can identify small efficiency enhancing projects.
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Bibliographic InfoPaper provided by Stanford University, Department of Economics in its series Working Papers with number 00006.
Date of creation: Mar 2000
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-04-26 (All new papers)
- NEP-CDM-2000-04-26 (Collective Decision-Making)
- NEP-IND-2000-04-26 (Industrial Organization)
- NEP-MIC-2000-04-26 (Microeconomics)
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- Blackorby, Charles & Donaldson, David, 1988. "Cash versus Kind, Self-selection, and Efficient Transfers," American Economic Review, American Economic Association, vol. 78(4), pages 691-700, September.
- Ahlberg, Joakim, 2006. "Optimal Taxation of Intermediate Goods in the Presence of Externalities: A Survey Towards the Transport Sector," Working Papers 2006:3, Swedish National Road & Transport Research Institute (VTI).
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