Moral Hazard and Optimal Commodity Taxation

52 Pages Posted: 19 Jun 2004 Last revised: 29 Aug 2010

See all articles by Richard J. Arnott

Richard J. Arnott

Boston College; National Bureau of Economic Research (NBER)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: June 1983

Abstract

The central result of this paper is that when moral hazard ispresent,competitive equilibrium is almost always (constrained) inefficient. Moral hazard causes shadow prices to deviate from market prices. To remedy this market failure, the government could introduce differential commodity taxation. Moral hazard causes people to take too little care to prevent accidents. The corresponding dead-weight 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 as-sociated with moral hazard, on the one hand, and differential commodity taxation, on the other, is minimized.

Suggested Citation

Arnott, Richard J. and Stiglitz, Joseph E., Moral Hazard and Optimal Commodity Taxation (June 1983). NBER Working Paper No. w1154. Available at SSRN: https://ssrn.com/abstract=305538

Richard J. Arnott (Contact Author)

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Joseph E. Stiglitz

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