Correcting Market Failure Due to Interdependent Preferences: When is Piecemeal Policy Possible?

36 Pages Posted: 11 Dec 2007

See all articles by Emanuela Randon

Emanuela Randon

affiliation not provided to SSRN

Peter J. Simmons

University of York - Department of Economics and Related Studies

Date Written: 2006-12-13

Abstract

Allowing for general utility interdependence and agent heterogeneity, we characterize taxes that will generate first best solutions in markets. We show the equivalence of tax corrections derived from the Marshallian and compensated demand approaches. Next we analyze the conditions that are required for the market failure to be corrected by: (1) specific indirect ad valorem taxes on commodities, (2) the same proportional tax rate on every commodity, and (3) a proportional income tax rate on each individual. The conditions are related to the restrictions necessary to have H synthetic consumers without externalities who replicate behavior of individuals with externalities.

Suggested Citation

RANDON, EMANUELA and Simmons, Peter J., Correcting Market Failure Due to Interdependent Preferences: When is Piecemeal Policy Possible? (2006-12-13). Journal of Public Economic Theory, Vol. 9, Issue 5, pp. 831-866, October 2007, Available at SSRN: https://ssrn.com/abstract=1067131 or http://dx.doi.org/10.1111/j.1467-9779.2007.00334.x

EMANUELA RANDON (Contact Author)

affiliation not provided to SSRN

Peter J. Simmons

University of York - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

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