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Commodity taxation and social welfare: the generalised Ramsey rule

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  • Coady, David
  • Dreze, Jean

Abstract

Commodity taxes have three distinct roles: (1) revenue collection, (2) interpersonal redistribution, and (3) resource allocation. The paper presents an integrated treatment of these three concerns in a second-best general equilibrium framework, which leads to the 'generalised Ramsey rule' for optimum taxation. We show how many standard results on optimum taxation and tax reform have a straightforward counterpart in this general framework. Using this framework, we also try to clarify the notion of 'deadweight loss' as well as the relation between alternative distributional assumptions and the structure of optimum taxes.

Suggested Citation

  • Coady, David & Dreze, Jean, 2000. "Commodity taxation and social welfare: the generalised Ramsey rule," LSE Research Online Documents on Economics 6651, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:6651
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    File URL: http://eprints.lse.ac.uk/6651/
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    References listed on IDEAS

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    6. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November.
    7. David Coady, 1997. "Agricultural Pricing Policies in Developing Countries: An Application to Pakistan," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(1), pages 39-57, January.
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    More about this item

    Keywords

    Commodity taxes; efficiency; redistribution; shadow prices;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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