Blackorby, Charles, 1937- and Murty, Sushama (2009) Constraints on income distribution and production efficiency in economies with Ramsey Taxation. Working Paper. University of Warwick, Department of Economics, Coventry.

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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.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HJ Public Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Taxation -- Econometric models, Production (Economic theory), Equilibrium (Economics), Right of property
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	15 May 2009
Number:	No.908
Number of Pages:	30
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	Dasgupta, P. and J. Stiglitz, \On Optimal Taxation and Public Production" The Review of Economic Studies 39, 1972, 87-103. Diamond, P. and J. Mirrlees, \Optimal Taxation and Public Production I: Production Efficiency" The American Economic Review 61, 1971, 8-27. Diamond, P. and J. Mirrlees, \Optimal Taxation and Public Production II: Tax Rules" The American Economic Review 61, 1971, 261-278. Drèze J. and N. Stern, The Theory of Cost Benet Analysis in Handbook of Public Economics, editors: A. J. Auerbach and M. Feldstein, II, Chapter 14, Elsevier Science Publishers, North Holland, 1987. Hahn F., \on Optimum Taxation" Journal of Economic Theory 6, 1973, 96-106. Guesnerie, R., A Contribution to the Pure Theory of Taxation, Cambridge, UK: Cambridge University Press, 1995. Little I. M. D. and J. Mirrlees, Project Appraisal and Planning for Developing Countries, Heinemann Educational Books, London, 1974. Mirrlees J., \On Producer Taxation" Review of Economic Studies 39, 1972, 105-111. Ramsey F., \A Contribution to the Theory of Taxation" The Economic Journal 37, 1927, 47-61. Reinhorn L., \Production Efficiency and Excess Supply" A Draft, 2005. Sadka E., \A Note on Producer Taxation" Review of Economic Studies 44, 1977, 385-387. Weymark J., \On Pareto Improving Price Changes" Journal of Economic Theory 19, 1978, 294-320.
URI:	http://wrap.warwick.ac.uk/id/eprint/1309

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