On Optimal Commodity Taxation in a Spatial Setting

Abstract

This paper is concerned with optimal commodity taxation in a spatial setting, represented by a monocentric urban model with homogenous people. It shows the need for an adjustment of the basic optimal taxation formulas, i.e. Ramsey (1927) and Atkinson and Stiglitz (1980), in a spatial setting and the reasons for this. The main finding is that the adjustment is not required to increase efficiency but rather to render the allocation competitively sustainable. Applying the basic (unadjusted) formula to a spatial setting requires income redistribution that is spatially differentiated and self-financed. This instrument is, by our premise, unavailable. Moreover, if this instrument were available, that is, spatially-differentiated head taxes and subsidies, it would render commodity taxation redundant in the first place. Unequal treatment of equals is reminiscent of Mirrlees (1972), but the reason for the two cases is completely different.

Keywords: Commodity taxation; Spatial economy

JEL Classification: H21; R14