Optimum Commodity Taxation in Pooling Equilibria

Eytan Sheshinski

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: This paper extends the standard model of optimum commodity taxation (Ramsey (1927) and Diamond-Mirrlees (1971)) to a competitive economy in which some markets are inefficient due to asymmetric information. As in most insurance markets, consumers impose varying costs on suppliers but …firms cannot associate costs to customers and consequently all are charged equal prices. In a competitive pooling equilibrium, the price of each good is equal to average marginal costs weighted by equilibrium quantities. We derive modi…ed Ramsey-Boiteux Conditions for optimum taxes in such an economy and show that they include general-equilibrium effects which re‡flect the initial deviations of producer prices from marginal costs, and the response of equilibrium prices to the taxes levied. It is shown that condition on the monotonicity of demand elasticities enables to sign the deviations from the standard formula. The general analysis is applied to the optimum taxation of annuities and life insurance.

Keywords: Asymmetric Information; Pooling Equilibrium; Ramsey-Boiteux Conditions; Annuities (search for similar items in EconPapers)
JEL-codes: D43 H21 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2006-08
New Economics Papers: this item is included in nep-mic, nep-pbe and nep-pub
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Related works:
Journal Article: Optimum commodity taxation in pooling equilibria (2007)
Working Paper: Optimum Commodity Taxation in Pooling Equilibria (2007)
Working Paper: Optimum Commodity Taxation in Pooling Equilibria (2006)
Working Paper: Optimum Commodity Taxation in Pooling Equilibri (2006)
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