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Applied Welfare Economics$
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Chris Jones

Print publication date: 2005

Print ISBN-13: 9780199281978

Published to Oxford Scholarship Online: July 2005

DOI: 10.1093/0199281971.001.0001

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Optimal Commodity Taxation

Optimal Commodity Taxation

(p.214) 9 Optimal Commodity Taxation
Applied Welfare Economics

Chris Jones (Contributor Webpage)

Oxford University Press

Rules for setting Ramsey (1927) optimal commodity taxes are derived in this chapter using the conventional welfare analysis presented in Ch. 6. When these tax rules apply, Diamond and Mirrlees (1971) and Stiglitz and Dasgupta (1971) prove that the producer prices can be used as shadow prices in project evaluation if private profits are eliminated from consumer incomes. This result is demonstrated using shadow prices to value the changes in economic activity from a marginal tax change. It provides economic intuition that can be used, together with the generalized Hatta decomposition, to extend a number of the familiar optimal tax rules to economies with variable prices.

Keywords:   Corlett–Hague rule, inverse-elasticity rule, Ramsey optimal taxes, shadow consumer taxes, shadow producer taxes

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