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Externality Policy Reform: A General Equilibrium Analysis

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  • SUSHAMA MURTY
  • R. ROBERT RUSSELL

Abstract

We characterize Pareto‐improving and equilibrium‐preserving policy reforms in a second‐best (Diamond/Mirrlees) world with a consumption externality. A counterintuitive finding is that, starting from an initial equilibrium with no direct quantity control on the externality, it is possible that all Pareto‐improving and equilibrium‐preserving directions of change require an increase in a negative externality. We provide intuition for these results by establishing a nexus between Guesnerie's approach to designing (tax) policy reforms and the standard Kuhn–Tucker technique for identifying the manifold of feasible Pareto‐optimal states, given the instruments available to the policy maker.

Suggested Citation

  • Sushama Murty & R. Robert Russell, 2005. "Externality Policy Reform: A General Equilibrium Analysis," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(1), pages 117-150, February.
    • Handle: RePEc:bla:jpbect:v:7:y:2005:i:1:p:117-150
    DOI: 10.1111/j.1467-9779.2005.00197.x
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    References listed on IDEAS

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    1. Bliss, C. J., 1975. "Capital Theory and the Distribution of Income," Elsevier Monographs, Elsevier, edition 1, number 9780720436044 edited by Bliss, C. J..
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    Cited by:

    1. Sushama Murty, 2016. "Measuring unilateral and multilateral gains from tackling current economic inefficiencies in CO2 reductions: Theory and evidence," Discussion Papers 1604, University of Exeter, Department of Economics.
    2. Murty, Sushama & Russell, R. Robert, 2010. "On modeling pollution-generating technologies," The Warwick Economics Research Paper Series (TWERPS) 931, University of Warwick, Department of Economics.
    3. Alan Krause, 2009. "A general equilibrium analysis of the Laffer argument," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 33(4), pages 601-615, November.
    4. Alan Krause, 2012. "Nonlinear Income Tax Reforms," Discussion Papers 12/03, Department of Economics, University of York.
    5. Alan Krause, 2014. "Piecewise Linear Income Tax Reforms," Discussion Papers 14/25, Department of Economics, University of York.
    6. Alan Krause, 2004. "The Dynamic Process of Tax Reform," Econometric Society 2004 Australasian Meetings 119, Econometric Society.
    7. Alan Krause, 2007. "A Tax Reform Analysis of the Laffer Argument," Discussion Papers 07/10, Department of Economics, University of York.

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