Correcting Market Failure Due to Interdependent Preferences: When Is Piecemeal Policy Possible?

Emanuela Randon () and Peter Simmons

Journal of Public Economic Theory, 2007, vol. 9, issue 5, pages 831-866

Abstract: Allowing for general utility interdependence and agent heterogeneity, we characterize taxes that will generate first best solutions in markets. We show the equivalence of tax corrections derived from the Marshallian and compensated demand approaches. Next we analyze the conditions that are required for the market failure to be corrected by: (1) specific indirect ad valorem taxes on commodities, (2) the same proportional tax rate on every commodity, and (3) a proportional income tax rate on each individual. The conditions are related to the restrictions necessary to have H synthetic consumers without externalities who replicate behavior of individuals with externalities. Copyright 2007 Blackwell Publishing, Inc..

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