Externality Policy Reform: A General Equilibrium Analysis
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. Copyright 2005 Blackwell Publishing Inc..
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Volume (Year): 7 (2005)
Issue (Month): 1 (02)
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