19 Pages Posted: 3 Feb 2004
Date Written: January 25, 2004
This paper analyzes the role of production distortion for income redistribution in an international trade model. In particular, it examines the role of the Stolper and Samuelson effect (Stolper and Samuelson, 1941) on efficient income redistribution. It first shows that production inefficiency can be a part of a Pareto-efficient tax system when there is an asymmetric information problem between the government and individuals. Second, by using the technique that Diamond and Mirrlees (1971) originally developed, this paper shows that such production inefficiency is not only Pareto-improving for a small country but also essential in achieving world-wide Pareto-efficient allocation. Those two results suggest important policy implications for commercial policies.
Keywords: Production efficiency, decentralized efficiency, international taxation
JEL Classification: H21, F13
Suggested Citation: Suggested Citation