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

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

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: consumption externality, optimal commodity taxation, Pigou, public good provision, Ramsey rule
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; D - Microeconomics > D6 - Welfare Economics > D62 - Externalities; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods

References

ABEL, A.B. (1999) Risk premia and term premia in general equilibrium, Journal of Monetary Economics 43, 3-33.

ALPIZAR, F., F. CARLSSON, and O. JOHANSSON-STENMAN (2005) How much do we care about absolute versus relative income and consumption?, Journal of Economic Behavior & Organization 56, 405-421.

ALVAREZ-CUADRADO, F., and N. VAN LONG (2011) Relative consumption and renewable resource extraction under alternative property-rights regimes, Resource and Energy Economics 33, 1028-1053.

ARONSSON, T., and O. JOHANSSON-STENMAN (2010) Positional concerns in an OLG model: optimal labor and capital income taxation, International Economic Review 51, 1071-1095.

ARONSSON, T., and O. JOHANSSON-STENMAN (2008) When the Joneses' consumption hurts: optimal public good provision and nonlinear income taxation, Journal of Public Economics 92, 986 - 997.

ATKINSON, A.B., and N.H. STERN (1974) Pigou, taxation and public goods, Review of Economic Studies 41, 119-128.

BATINA, R.G. (1990a) Public goods and dynamic efficiency. The modified Samuelson rule, Journal of Public Economics 41, 389-400.

BATINA, R.G. (1990b) On the interpretation of the modified Samuelson rule for public goods in static models with heterogeneity, Journal of Public Economics 42, 125-133.

BOSKIN, M.J., and E. SHESHINSKY (1978) Optimal redistributive taxation when individual welfare depends upon relative income, Quarterly Journal of Economics 92, 589-601.

BRADFORD, D., and G. HILDEBRANDT (1977) Observable preferences for public goods, Journal of Public Economics 8, 111-131.

BREKKE, K.A., and R.B. HOWARTH (2002) Status, growth and the environment. Goods as symbols in applied welfare economics. Cheltenham: Edward Elgar.

CAMPBELL, C., and J. COCHRANE (1999) By force of habit: A consumption-based explanation of aggregate stock market behavior, Journal of Political Economy 107, 205-251.

CARLSSON, F., O. JOHANSSON-STENMAN, and P. MARTINSSON (2007) Do you enjoy having more than others? Survey evidence of positional goods, Economica 74, 586-598.

CARROLL, C.D., J. OVERLAND, and D.N. WEIL (1997) Comparison utility in a growth model, Journal of Economic Growth 2, 339-367.

CHANG, M.C. (2000) Rules and levels in the provision of public goods: The role of complementarities between the public good and taxed commodities, International Tax and Public Finance 7, 83-91.

DIAMOND, P., and J. MIRRLEES (1971) Optimal taxation and public production I and II, American Economic Review 61, 8-27, 261-278.

DUPOR, B., and W.F. LIU (2003) Jealousy and equilibrium overconsumption, American Economic Review 93, 423-428.

EASTERLIN, R.A. (1995) Will raising the incomes of all increase the happiness of all?, Journal of Economic Behavior & Organization 27, 35-47.

FERRER-I-CARBONELL, A. (2005) Income and well-being: An empirical analysis of the comparison income effect, Journal of Public Economics 89, 997-1019.

FRANK, R.H. (1985) Choosing the right pond. Human behavior and the quest for status. New York: Oxford University Press.

FRANK, R.H. (1999) Luxury fever. Why money fails to satisfy in an era of excess. New York: The Free Press.

GAUBE, T. (2000) When do distortionary taxes reduce the optimal supply of public goods?, Journal of Public Economics 76, 151-180.

GAUBE, T. (2005) Financing public goods with income taxation: provision rules vs. provision level, International Tax and Public Finance 12, 319-334.

JOHANSSON-STENMAN, O., F. CARLSSON, and D. DARUVALA (2002) Measuring future grantparents' preferences for equality and relative standing, Economic Journal 112, 362-383.

JOHANSSON-STENMAN, O., and P. MARTINSSON (2006) Honestly, why are you driving a BMW?, Journal of Economic Behavior & Organization 60, 129-146.

KERN, W.S. (2001) Classical economic man: Was he interested in keeping up with the Joneses?, Journal of the History of Economic Thought 23, 353-368.

KING, M.A. (1986) A Pigovian rule for the optimum provision of public goods, Journal of Public Economics 30, 273-291.

LAYARD, R. (1980) Human satisfactions and public policy, Economic Journal 90, 737-750.

LIU, W.F., and S.J. TURNOVSKY (2005) Consumption externalities, production externalities, and long-run macroeconomic efficiency, Journal of Public Economics 89, 1097-1129.

LJUNGQVIST, L., and H. UHLIG (2000) Tax policy and aggregate demand management under catching up with the Joneses, American Economic Review 90, 356-366.

LUTTMER, E.F.P. (2005) Neighbors as negatives: Relative earnings and well-being, Quarterly Journal of Economics 120, 963-1002.

MCBRIDE, M. (2001) Relative-income effects on subjective well-being in the cross-section, Journal of Economic Behavior & Organization 45, 251-278.

MEADE, W. (1952) External economies and diseconomies in a competitive situation, Economic Journal 62, 54-67.

NEUMARK, D., and A. POSTLEWAITE (1998) Relative income concerns and the rise in married women's employment, Journal of Public Economics 70, 157-183.

NG, Y.-K. (1987) Relative income effects and the appropriate level of public expenditures, Oxford Economic Papers 39, 293-300.

PIGOU, A. (1947) A study in public finance. London: Macmillan.

SCITOVSKY, T. (1992) The joyless economy. The psychology of human satisfaction. New York and Oxford: Oxford University Press.

SMITH, A. (1759) The theory of moral sentiments, in The theory of moral sentiments, Raphael, D.D. and A.L. Macfie, eds. (1976) Oxford: Oxford University Press.

SOLNICK, S.J., and D. HEMENWAY (1998) Is more always better? A survey on positional concerns, Journal of Economic Behavior & Organization 37, 373-383.

SOLNICK, S.J., and D. HEMENWAY (2005) Are positional concerns stronger in some domains than in others?, American Economic Review 95, 147-151.

STIGLITZ, J.E., and P. DASGUPTA (1971) Differential taxation, public goods, and economic efficiency, Review of Economic Studies 38, 151-174.

VAN LONG, N., and F. ALVAREZ-CUADRADO, Envy and inequality, Scandinavian Journal of Economics, forthcoming.

WENDNER, R., and L.H. GOULDER (2008) Status effects, public goods provision, and excess burden, Journal of Public Economics 92, 1968-1985.

WILDASIN, D.E. (1984) On public good provision with distortionary taxation, Economic Inquiry 22, 227-585.

WILSON, J.D. (1991) Optimal public good provision and the Ramsey tax model, Economics Letters 35, 57-61.