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Optimum Commodity Taxation in Pooling Equilibria

Eytan Sheshinski ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper extends the standard model of optimum commodity taxation (Ramsey (1927)and Diamond-Mirrlees (1971)) to a competitive economy in which markets are inefficient due to asymmetric information. Insurance markets are prime examples: consumers impose varying costs on suppliers but firms cannot associate costs with individual customers and consequently all are charged equal prices. In such a competitive pooling equilibrium, the price of each good is equal to the average of individual marginal costs weighted by equilibrium quantities. We derive modified Ramsey Boiteux Conditions for optimum taxes in such an economy and show that, in addition to the standard formula, they include first-order effects which reflect the deviations of prices from marginal costs and the response of equilibrium quantities to the taxes levied. An explanation of the additional terms is provided. It is shown that a condition on the monotonicity of demand elasticities enables to sign the direction of the deviations from the standard case.

Keywords: Asymmetric Information; Pooling Equilibrium; Ramsey-Boiteux Conditions; Annuities. (search for similar items in EconPapers)
JEL-codes: H0 (search for similar items in EconPapers)
Date: 2006, Revised 2007
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Related works:
Journal Article: Optimum commodity taxation in pooling equilibria (2007) Downloads
Working Paper: Optimum Commodity Taxation in Pooling Equilibria (2006) Downloads
Working Paper: Optimum Commodity Taxation in Pooling Equilibri (2006) Downloads
Working Paper: Optimum Commodity Taxation in Pooling Equilibria (2006) Downloads
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