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

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  • Blackorby, Charles
  • Murty, Sushama

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 effi- ciency. 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.

Suggested Citation

  • Blackorby, Charles & Murty, Sushama, 2009. "Constraints on Income Distribution and Production Efficiency In Economies with Ramsey Taxation," Economic Research Papers 271292, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:271292
    DOI: 10.22004/ag.econ.271292
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    References listed on IDEAS

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    1. Partha Dasgupta & Joseph Stiglitz, 1972. "On Optimal Taxation and Public Production," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 39(1), pages 87-103.
    2. Dreze, Jean & Stern, Nicholas, 1987. "The theory of cost-benefit analysis," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989, Elsevier.
    3. Reinhorn, Leslie J., 2013. "Production efficiency and excess supply," Mathematical Social Sciences, Elsevier, vol. 65(2), pages 92-100.
    4. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
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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;The Society for Social Choice and Welfare, vol. 41(3), pages 579-604, September.
    2. Stéphane Gauthier & Guy Laroque, 2019. "Production efficiency and profit taxation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 52(2), pages 215-223, February.
    3. Murty, Sushama, 2009. "Topology of utility possibility frontiers of economies with Ramsey taxation," The Warwick Economics Research Paper Series (TWERPS) 912, University of Warwick, Department of Economics.

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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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