Ramsey, Pigou, Heterogeneous Agents, and Nonatmospheric Consumption Externalities

Ron Wendner

Journal of Public Economic Theory, 2014, vol. 16, issue 3, 491-521

Abstract: This paper analyzes the effects of nonatmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second-best level of public good provision to exceed the first-best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, the second-best commodity tax rate may fall short of the first-best rate. Moreover, in this case, heterogeneity may imply an equity-efficiency tradeoff. This tradeoff is present only if the consumption externality is of the nonatmospheric type.

Date: 2014
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Working Paper: Ramsey, Pigou, heterogenous agents, and non-atmospheric consumption externalities (2011)
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