Pareto Improving Taxes

28 Pages Posted: 4 Sep 2006

See all articles by John Geanakoplos

John Geanakoplos

Yale University; Santa Fe Institute

H. M. Polemarchakis

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Multiple version iconThere are 2 versions of this paper

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

Geanakoplos, John D and Polemarchakis, Herakles, Pareto Improving Taxes (August 2006). Cowles Foundation Discussion Paper No. 1576, Available at SSRN: https://ssrn.com/abstract=928075 or http://dx.doi.org/10.2139/ssrn.928075

John D Geanakoplos (Contact Author)

Yale University ( email )

30 Hillhouse Avenue
New Haven, CT 06511
United States
203-432-3397 (Phone)

HOME PAGE: http://https://economics.yale.edu/people/faculty/john-geanakoplos

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Herakles Polemarchakis

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

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