Pareto Improving Taxes
28 Pages Posted: 4 Sep 2006
There are 2 versions of this paper
Pareto Improving Taxes
Pareto Improving Taxes
Date Written: August 2006
Abstract
We show that in almost every economy with separable externalities, every competitive equilibrium can be Pareto improved by a package of anonymous commodity taxes that cause prices to adjust and markets to reclear at different levels of individual consumption. The argument can be extended to economies with strategic interactions, incomplete asset markets or asymmetric information. This constrained suboptimality of competitive allocations might provide a rationale for economic policy in economies with externalities.
Keywords: Externalities, Commodity taxes, Constrained suboptimality
JEL Classification: D50, D60, D62, D82
Suggested Citation: Suggested Citation