Constraints on Income Distribution and Production Efficiency In Economies with Ramsey Taxation

Charles Blackorby and Sushama Murty ()

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: We study the link between second-best production efficiency and the constraints on income distribution imposed by private ownership of firms in economies with Ramsey taxation. We review the result of Dasgupta and Stiglitz [1972], Mirrlees [1972], Hahn [1973], and Sadka [1977] about firm-specific profit taxation leading to second-best production efficiency. Problems in the proofs of this result in these papers have been identified by Reinhorn [2005]. We provide an alternative, and with some hope a more intuitive, proof of this result. The mechanism employed in our proof is also used to show second-best production efficiency under some configuarations of private ownership without any (or at best, uniform) profit taxation. The results obtained raise questions about the genericity of the phenomenon of second-best production inefficiency and about recovering social shadow prices in such economies.

Keywords: Ramsey taxation; production inefficiency; general equilibrium; private ownership (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec and nep-pub
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Citations: View citations in EconPapers (7)

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Working Paper: Constraints on Income Distribution and Production Efficiency In Economies with Ramsey Taxation (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:908

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