Generally, implementation of Pigovian taxes to correct for market failure requires an enormous set of information. For each commodity-person combination a different tax is required to correct the resulting market inefficiency. In this paper, we analyse interdependent preferences and inefficiency of the market solution with the aim of finding conditions justifying simple rules for such taxes. We examine the utility possibility curve and Scitovsky community indifference curve, allowing for general utility interdependence and agent heterogeneity. In particular we show the equivalence of taxes derived from the Marshallian and compensated demand approaches. We move on to analyse the welfare cost of consumption externalities and show that it decomposes into part due to individuals choosing suboptimal quantities and part due to individuals using valuations that are not socially optimal. We show what forms of externality can justify simple policy corrections. In particular, we analyse the conditions which are required for the market failure to be corrected by: 1) specific indirect ad valorem taxes on commodities, 2) the same proportional tax rate on every commodity, 3) a proportional income tax rate on each individual. The conditions are related to the restrictions necessary to have H synthetic consumers without externalities who replicate behaviour of individuals with externalities. An example with two individuals and three goods concludes the paper.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Department of Economics, University of York in its series Discussion Papers with number
05/12.
Length: Date of creation: Date of revision: Handle: RePEc:yor:yorken:05/12
Contact details of provider: Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom Phone: (0)1904 433776 Fax: (0)1904 433759 Email: Web page: http://www.york.ac.uk/depts/econ/ More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Michael Shallcross).
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: