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Moral Hazard and Optimal Commodity Taxation

  • Richard Arnott
  • Joseph Stiglitz

The central result of this paper is that when moral hazard is present, shadow prices in general differ from market prices. To remedy this market failure, the government should introduce differential commodity taxation. Moral hazard causes people to take too little care to prevent accidents. The corresponding deadweight loss can be reduced by subsidizing (taxing) those goods the consumption of which encourages (discourages) accident avoidance. At the constrained optimum, the sum of the deadweight losses and differential commodity taxation is minimized. Policy implications are derived and discussed.

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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 500.

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Length: 47
Date of creation: 1982
Date of revision:
Handle: RePEc:qed:wpaper:500
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  1. anonymous, 1982. "New Zealand economic chronology 1981," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 45, january/f.
  2. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  3. anonymous, 1982. "International economic situation and outlook," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 45, january/f.
  4. anonymous, 1982. "Time and economics," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 4-5.
  5. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers 210, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
  7. anonymous, 1982. "Economic policy measures," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 45, july.
  8. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February.
  9. anonymous, 1982. "International economic situation and developments," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 45, august.
  10. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  11. Richard J. Arnott & Arthur Hosios & Joseph Stiglitz, 1987. "Implicit Contracts, Labor Mobility and Unemployment," NBER Working Papers 2316, National Bureau of Economic Research, Inc.
  12. Weiss, Laurence, 1976. "The Desirability of Cheating Incentives and Randomness in the Optimal Income Tax," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1343-52, December.
  13. Anonymous, 1982. "The Biologic and Economic Assessment of DBCP," Technical Bulletins 157639, United States Department of Agriculture, Economic Research Service.
  14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  15. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
  16. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, vol. 61(2), pages 380-87, May.
  17. Anonymous, 1982. "The Biologic and Economic Assessment of 2, 4, 5-T," Technical Bulletins 157646, United States Department of Agriculture, Economic Research Service.
  18. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  19. Braverman, Avishay & Stiglitz, Joseph E, 1982. "Sharecropping and the Interlinking of Agrarian Markets," American Economic Review, American Economic Association, vol. 72(4), pages 695-715, September.
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