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Ramsey, Pigou, heterogenous agents, and non-atmospheric consumption externalities

Wendner, Ronald (2011): Ramsey, Pigou, heterogenous agents, and non-atmospheric consumption externalities.

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Abstract

This paper analyzes the effects of non-atmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second-best level of public good provision to exceed the first-best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, heterogeneity may imply an equity-efficiency tradeoff. This tradeoff is present only if the consumption externality is of the non-atmospheric type.

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