Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 10 Easy Difficulty The development of optimal tax policy has been a major topic in public finance for centuries. 18Probably the most famous result

image text in transcribed
Problem 10 Easy Difficulty The development of optimal tax policy has been a major topic in public finance for centuries. 18Probably the most famous result in the theory of optimal taxation is due to the English economist Frank Ramsey, who conceptualized the problem as how to structure a tax system that would collect a given amount of revenues with the minimal deadweight loss. 19Specifically, suppose there are n goods (xi with prices pi) to be taxed with a scquence of ad valorem taxes (see Problem 12.9 ) whose rates are given by ti(i =1,n). Total tax revenue is therefore given by T=Afrin Ramsey's problem, then, is for a fixed T to choose tax rates that will minimize total deadweight loss DW = >_PW(ti). a. Use the Lagrangian multiplier method to show that the solution to Ramscy's problem requires ti= (1/es-1/ep), where > is the Lagrangian multiplier for the tax constraint. b. Interpret the Ramsey result intuitively. c. Describe some shortcomings of the Ramsey approach to optimal taxation

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Environmental And Natural Resource Economics International Edition

Authors: Thomas H Tietenberg, Lynne Lewis

10th Edition

1292060794, 9781292060798

More Books

Students also viewed these Economics questions

Question

Peoples understanding of what is being said

Answered: 1 week ago

Question

The quality of the proposed ideas

Answered: 1 week ago