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Journal ArticleDOI

Price distortion and economic welfare

01 Mar 1970-Econometrica (Econometric Society)-Vol. 38, Iss: 2, pp 281-297
TL;DR: In this article, the authors study a standard n-commodity model where equilibrium positions are characterized by specified inequalities between society's marginal rates of transformation in production and a single consumer's marginal rate of substitution in consumption; these inequalities are exemplified by, but not limited to, excise taxes and subsidies.
Abstract: We study a standard n-commodity model in which equilibrium positions are characterized by specified inequalities between society's marginal rates of transformation in production and a single consumer's marginal rates of substitution in consumption; these inequalities are exemplified by, but not limited to, excise taxes and subsidies. We explore circumstances under which certain increases in these "taxes" and "subsidies" can be said to decrease welfare. In order to do so, we look for conditions under which the equilibrium consumption vector is well defined by a specification of the taxes and subsidies, and find that the conditions required are stringent. Among our conclusions is the proposition that the validity of consumers' surplus measures for analyzing such problems may depend on assumptions that are more strict than their users have realized.
Citations
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Posted Content
TL;DR: In this article, the problem of using taxation and government production to maximize a social welfare function was studied, and the first-order conditions were derived and the argument for efficiency in aggregate production was considered.
Abstract: set out the problem of using taxation and government production to maximize a social welfare function. We derived the first-order conditions, and considered the argument for efficiency in aggregate production. Here in Part II we consider the structure of optimal taxes in more detail. Part I contained five sections, and Part II begins at Section VI. In the sixth and seventh sections we consider commodity taxation in one- and many-consumer economies. In the eighth section we consider other kinds of taxes; and in the ninth, public consumption. In the tenth section we consider a rigorous treatment of the problem, giving a sufficient condition for the validity of the first-order conditions. To begin, we shall restate the notation and basic problem. Notation

1,050 citations

Posted Content
TL;DR: This article extended their thanks to a research assistant for help extending well beyond the normal call of duty, and Rudiger Dornbusch and Robert Gordon for valuable suggestions given after the first draft of this paper was completed.
Abstract: I would like to extend my thanks to my colleague, Harry G. Johnson, for hi8 helpful comments, to Daniel Wisecarver, for help extending well beyond the normal call of duty for a research assistant, and to Rudiger Dornbusch and Robert Gordon for valuable suggestions given after the first draft of this paper was completed. Needless to add, they do not bear any responsibility for such flaws or deficiencies as may remain in this paper.

708 citations

Book
01 Jan 1992
TL;DR: The trade restrictiveness index as discussed by the authors measures the restrictiveness of a system of trade protection, which is a general equilibrium application of the distance function and answers the question: "What uniform set of trade restrictions is equivalent (in welfare terms) to the initial protective structure?" The index is applicable to both tariffs and quotas and allows international and intertemporal comparisons.
Abstract: This paper introduces a new measure, the Trade Restrictiveness Index, which measures the restrictiveness of a system of trade protection. The index is a general equilibrium application of the distance function and answers the question: "What uniform set of trade restrictions is equivalent (in welfare terms) to the initial protective structure?" The index is applicable to both tariffs and quotas and allows international and intertemporal comparisons. The index is operational and we provide an empirical example to illustrate its applicability and to show its superiority to commonly used measures.

269 citations

Posted Content
TL;DR: In this paper, the authors present the chronological development of the concept of excess burden and the related study of optimal tax theory, and uncover the interrelationships among various apparently distinct results, bringing out the basic structure of the entire problem.
Abstract: The purpose of this paper is to present the chronological development ofthe concept of excess burden and the related study of optimal tax theory. A main objective of this exercise is to uncover the interrelationships among various apparently distinct results, so as to bring out the basic structure of the entire problem.The paper includes a discussion of various measures of excess burden,focusing on issues of approximation, informational requirements, aggregation over individuals, and the effects of technology. Included in the presentation of optimal tax theory is a section on tax reform, as well as an application of the theory to the case where uncertainty is present.

230 citations

Journal ArticleDOI
TL;DR: In this paper, the authors show that a policy which reduces all price distortions uniformly will improve the welfare of the economy, if it is stable in the Marshallian sense, and if the good with the highest distortion is substitutable for all the other goods and the economy is stable under the AIM, if the aggregate of income terms weighted by marginal costs (AIM) is positive.
Abstract: The theory of the second best, first formally presented by Lipsey and Lancaster [16], maintains that the abolition of an arbitrarily chosen distortion in an economy with multiple distortions may reduce the welfare of the economy The main objective of the present paper is to formulate some piecemeal policy recommendations which would definitely result in a move towards efficiency In particular, we will prove the following: (a) a policy which reduces all price distortions uniformly will improve the welfare of the economy, if it is stable in the Marshallian sense (b) a policy which brings the highest distortion to the level of the next highest will improve the welfare of the economy, if the good with the highest distortion is substitutable for all the other goods and if the economy is stable in the Marshallian sense Our results integrate the characterization of the second best solution by Green [9], the analysis of the uniform reduction of tariff and excise tax by Foster and Sonnenschein [8] and Bruno [4], and the demonstration by Kemp [15] that the welfare effect of the tariff reduction in the two commodity world is related to the stability of the economy In the present paper, an extensive use of the compensated demand function enables us to reveal the underlying relationship among these seemingly unrelated works' In Section 2, we will define the compensated demand function, and will present its properties used in this paper The model will be presented in Section 3 In Section 4 we will establish that in an economy with constant-cost technology a uniform reduction in excise tax rates improves welfare provided that the aggregate of income terms weighted by marginal costs (AIM) is positive We will also show that a reduction of the highest tax rate to the level of the next highest rate improves the welfare if the AIM is positive and if the good with the highest tax rate is substitutable for all other goods In Section 5 the main theorems will be proved by establishing that the positivity of AIM in the propositions of Section 4 can be replaced by another condition if the economy is stable under the Marshallian adjustment mechanism (which is defined in the text) Section 6 will re-evaluate the theory of the second best from our framework (This section can be read independently of Section 5) Throughout this paper, a matrix will be denoted by an upper-case letter; a lower-case bold-faced letter will represent a column vector; its transpose will be shown by a prime; and the ith element of the vector is denoted by the same letter with subscript i, unless stated otherwise

210 citations

References
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Journal ArticleDOI
TL;DR: The use of community indifference curves has been extensively studied in the literature as discussed by the authors, with a focus on the problem of family preference and on the regular properties of social indifference contours.
Abstract: I. Introduction: widespread use of community indifference curves, 1. — II. Attempts to justify the use of community indifference curves, 3. — III. Proof of the nonexistence of community indifference contours, 4. — IV. Nature of Scitovsky's community indifference contours, 6. — V. Problem of family preference: a parable, 8. — VI. Optimal ways of achieving income redistribution, 12. — VII. Regular properties of social indifference contours, 14. — VIII. Perfect competition and bliss, 19. — IX. Final summary, 21.

893 citations

Journal Article
TL;DR: In this article, the authors defend the use of marginal cost pricing for railways and support federal investments in the Tennessee Valley Authority (TVA), arguing that a rough randomness in distribution should be sufficient to ensure that most persons in every part of the country would be better off by reason of the program as a whole.
Abstract: This classic paper defends the use of marginal cost pricing for railways. The author views his contributions as an extension of Dupuit's fundamental insights concerning the relation between the general welfare and railway and utility rates. The basic purpose of the paper is to justify the public subsidization of declining cost industries. In discussing the theoretical results, the author strongly supports federal investments in the Tennessee Valley Authority. Although various externalities would accrue to those living outside the region, the author acknowledges that taxpayers not living in the region would be expected to lose on account of the project, but a rough randomness in distribution should be ample to ensure such a distribution of benefits that most persons in every part of the country would be better off by reason of the program as a whole. Two groups are singled out that might expect not to benefit from the consistent application of total benefit maximization: the very wealthy, who would likely be asked to pay considerable taxes, and the land speculators, who would likely face increases in property taxes.

654 citations

Book ChapterDOI
TL;DR: In this article, the authors present an argument due essentially to the engineer Jules Dupuit, to the effect that the optimum of the general welfare corresponds to the sale of everything at marginal cost.
Abstract: In this paper we shall bring down to date in revised form an argument due essentially to the engineer Jules Dupuit, to the effect that the optimum of the general welfare corresponds to the sale of everything at marginal cost. This means that toll bridges, which have recently been reintroduced around New York, are inefficient reversions; that all taxes on commodities, including sales taxes, are more objectionable than taxes on incomes, inheritances, and the site value of land; and that the latter taxes might well be applied to cover the fixed costs of electric power plants, waterworks, railroads, and other industries in which the fixed costs are large, so as to reduce to the level of marginal cost the prices charged for the services and products of these industries. The common assumption, so often accepted uncritically as a basis of arguments on important public questions, that “every tub must stand on its own bottom,” and that therefore the products of every industry must be sold at prices so high as to cover not only marginal costs but also all the fixed costs, including interest on irrevocable and often hypothetical investments, will thus be seen to be inconsistent with the maximum of social efficiency. A method of measuring the loss of satisfactions resulting from the current scheme of pricing, a loss which appears to be extremely large, will emerge from the analysis. It will appear also that the inefficient plan of requiring that all costs, including fixed overhead, of an industry shall be paid out of the prices of its products is responsible for an important part of the instability which leads to cyclical fluctuations and unemployment of labor and other resources.

643 citations

Posted Content
01 Jan 1964

280 citations

Journal ArticleDOI
TL;DR: In this paper, it was shown that the Lipsey-Lancaster formulation of the second-best problem introduces extraneous considerations, does not provide adequate guidelines for policy applications, and leads, at the very best, to misinterpretations of the meaning of their theorem.
Abstract: : Conditions are demonstrated under which a violation of one Pareto condition means that it is socially desirable that certain other of the Paretian conditions be violated The commonly held interpretation of the Lipsey-Lancasterassified report DESCRIPTORS: *Economics, Theory, Mathematical analysis, Functions, Partial differential equations, Decision making Identifiers: Pareto condition (Economics), Theory of second best, Welfare economics Conditions are demonstrated under which a violation of one Pareto condition means that it is socially desirable that certain other of the Paretian conditions be violated The commonly held interpretation of the Lipsey-Lancaster theorem - that a violation of one Pareto condition means that none of the remaining Pareto conditions is desirable - is dispelled The approach is somewhat similar to that used by Lipsey and Lancaster in that the method of maximinization subject to constraints is used It is demonstrated that the Lipsey-Lancaster formulation of the second-best problem introduces extraneous considerations, does not provide adequate 'guidelines' for policy applications, and leads, at the very best, to misinterpretations of the meaning of their theorem (Author)

107 citations

Trending Questions (1)
How do impact of price mechanisim the decreased income and welfare of merchants?

The provided paper does not specifically discuss the impact of price mechanisms on the decreased income and welfare of merchants.