Chapter 14

The Second-Best Theory of Taxation with General Production Technologies and Many Consumers

Abstract

Chapter 14 extends the analysis of distorting taxes in two directions to make it more responsive to real-world economies. The first is to incorporate general production technologies, with increasing cost production-possibilities frontiers. An important result is that the optimal commodity tax rule is unchanged; it does not include production terms. A second extension is to consider the case of many consumers with different tastes and different marginal social welfare weights. The social welfare maximizing pattern of tax rates is derived under both linear and general technologies. Other topics include the effects on social welfare of any ...

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