Public Finance, 3rd Edition

Many-Person Economy with General Technology

Synthesizing the separate analyses of a one-person economy with general technology and the many-person economy with linear technology (constant producer prices) is relatively straightforward, especially under the assumption of CRS production.

Let us begin by considering the optimal commodity tax problem. We saw that assuming CRS in the context of a one-consumer economy generates the same optimal tax rules that result when production technology is characterized by fixed producer prices. The key to this result is that there can never be pure economic profits or losses under CRS and perfect competition, so that the value of the general equilibrium profit function π (p→) is identically zero for all values ...