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Correcting Market Failure Due to Interdependent Preferences: When Is Piecemeal Policy Possible?
Author(s) -
RANDON EMANUELA,
SIMMONS PETER
Publication year - 2007
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2007.00334.x
Subject(s) - economics , externality , commodity , microeconomics , interdependence , market failure , equivalence (formal languages) , ricardian equivalence , monetary economics , fiscal policy , market economy , linguistics , philosophy , political science , law
Allowing for general utility interdependence and agent heterogeneity, we characterize taxes that will generate first best solutions in markets. We show the equivalence of tax corrections derived from the Marshallian and compensated demand approaches. Next we analyze the conditions that are required for the market failure to be corrected by: (1) specific indirect ad valorem taxes on commodities, (2) the same proportional tax rate on every commodity, and (3) a proportional income tax rate on each individual. The conditions are related to the restrictions necessary to have H synthetic consumers without externalities who replicate behavior of individuals with externalities.