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Generalized Production Efficiency

Author

Listed:
  • Laurence Jacquet
  • Etienne Lehmann

    (CY Cergy Paris Université, THEMA)

Abstract

When should governments sacrifice production efficiency for redistribution? We generalize the celebrated result of Diamond and Mirrlees (1971a,b) by allowing for imperfect competition, suboptimal and nonlinear taxation. We demonstrate that production efficiency hinges on the flexibility of the tax system in compensating gains and losses from changes in factor prices. This requires the tax system to target each factor’s income. We show how to adjust tax systems or production policies for imperfect targeting and market failures, even when the tax system is not flexible enough. Endogenous factor prices do not modify the test to identify Pareto-improving tax reforms.

Suggested Citation

  • Laurence Jacquet & Etienne Lehmann, 2025. "Generalized Production Efficiency," THEMA Working Papers 2025-08, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2025-08
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    File URL: https://thema.u-cergy.fr/IMG/pdf/2025-08.pdf
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    More about this item

    Keywords

    Production efficiency; Nonlinear income taxation; Several income sources;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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