Moral Hazard and Optimal Commodity Taxation

Richard Arnott and Joseph Stiglitz

Working Paper from Economics Department, Queen's University

Abstract: The central result of this paper is that when moral hazard is present, shadow prices in general differ from market prices. To remedy this market failure, the government should introduce differential commodity taxation. Moral hazard causes people to take too little care to prevent accidents. The corresponding deadweight loss can be reduced by subsidizing (taxing) those goods the consumption of which encourages (discourages) accident avoidance. At the constrained optimum, the sum of the deadweight losses and differential commodity taxation is minimized. Policy implications are derived and discussed.

Pages: 47
Date: 1982
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Related works:
Journal Article: Moral hazard and optimal commodity taxation (1986)
Working Paper: Moral Hazard and Optimal Commodity Taxation (1983)
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