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Constraints on Income Distribution and Production Efficiency In Economies with Ramsey Taxation

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  • Blackorby, Charles

    (Department of Economics, University of Warwick)

  • Murty, Sushama

    (Department of Economics, University of Warwick)

Abstract

We study the link between second-best production efficiency and the constraints on income distribution imposed by private ownership of firms in economies with Ramsey taxation. We review the result of Dasgupta and Stiglitz [1972], Mirrlees [1972], Hahn [1973], and Sadka [1977] about firm-specific profit taxation leading to second-best production efficiency. Problems in the proofs of this result in these papers have been identified by Reinhorn [2005]. We provide an alternative, and with some hope a more intuitive, proof of this result. The mechanism employed in our proof is also used to show second-best production efficiency under some configuarations of private ownership without any (or at best, uniform) profit taxation. The results obtained raise questions about the genericity of the phenomenon of second-best production inefficiency and about recovering social shadow prices in such economies.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 908.

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Date of creation: 2009
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Handle: RePEc:wrk:warwec:908

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Keywords: Ramsey taxation ; production inefficiency ; general equilibrium ; private ownership;

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Cited by:
  1. Sushama Murty, 2013. "Production efficiency and constraints on profit taxation and profit distribution in economies with Ramsey taxation," Social Choice and Welfare, Springer, Springer, vol. 41(3), pages 579-604, September.
  2. Murty, Sushama, 2009. "Topology of utility possibility frontiers of economies with Ramsey taxation," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 912, University of Warwick, Department of Economics.

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