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Asymmetric and non-atmospheric consumption externalities, and efficient consumption taxation

  • Eckerstorfer, Paul
  • Wendner, Ronald

We analyze the effects of a generalized class of negative consumption externalities (asymmetric and non-atmospheric) on the structure of efficient commodity tax programs. Households are not only concerned about consumption reference levels — that is, they gain utility from “keeping up with the Joneses” — but they also exhibit altruism. Two sets of efficient tax regimes are compared, based, on a welfarist- and a non-welfarist optimality criterion, respectively. Altruism turns out not to be at odds with the consumption externalities. Rather, altruism implicates a bound on efficient utility allocations. A non-welfarist government tolerates less inequality than a welfarist one. In the welfarist (non-welfarist) case, first-best personalized commodity tax rates respond highly sensitively (barely) to whether or not a consumption externality is asymmetric or non-atmospheric. If personalized commodity tax rates are not available (second-best case), the tax rate on a non-positional good is typically different from zero for corrective reasons. For plausible functional forms and parameter values, numerical simulations suggest that second-best tax rates are rather insensitive with respect to both the optimality criterion and the “nature” of the consumption externality.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 106 (2013)
Issue (Month): C ()
Pages: 42-56

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Handle: RePEc:eee:pubeco:v:106:y:2013:i:c:p:42-56
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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