Ramsey, Pigou, Heterogenous Agents, and Non-Atmospheric Consumption Externalities
31 Pages Posted: 25 Nov 2011
Date Written: November 25, 2011
Abstract
This paper analyzes the effects of non-atmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second-best level of public good provision to exceed the first-best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, heterogeneity may imply an equity-efficiency tradeoff. This tradeoff is present only if the consumption externality is of the non-atmospheric type.
Keywords: consumption externality, optimal commodity taxation, Pigou, public good provision, Ramsey rule
JEL Classification: D62, H21, H41
Suggested Citation: Suggested Citation
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