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Ramsey, Pigou, and a Consumption Externality

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  • Wendner, Ronald

Abstract

This paper analyzes the effects of consumption externalities on optimal taxation and on the social cost and optimal levels of public good provision. If public and private goods are Hicksian complements and no lump sum taxes are available, the second-best level of public good provision can exceed the first-best level. In contrast to economies without externalities, this result even holds for Cobb-Douglas economies with homogeneous agents. Heterogeneity of agents raises the second-best commodity tax rate due to equity considerations, but lowers the tax rate due to the concern for externality-correction.

Suggested Citation

  • Wendner, Ronald, 2010. "Ramsey, Pigou, and a Consumption Externality," MPRA Paper 21356, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:21356
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    File URL: https://mpra.ub.uni-muenchen.de/21356/1/MPRA_paper_21356.pdf
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    References listed on IDEAS

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    Cited by:

    1. Thomas Aronsson & Olof Johansson-Stenman, 2013. "Veblen’s theory of the leisure class revisited: implications for optimal income taxation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 41(3), pages 551-578, September.
    2. Graafland, J.J., 2010. "Why Status Effects Need not Justify Egalitarian Income Policy," Discussion Paper 2010-73, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

    consumption externality; public good provision; Ramsey rule; Pigou;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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