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Correcting Market Failure Due to Interdependent Preferences: When Is Piecemeal Policy Possible?

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  • EMANUELA RANDON
  • PETER SIMMONS

Abstract

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.

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  • Emanuela Randon & Peter Simmons, 2007. "Correcting Market Failure Due to Interdependent Preferences: When Is Piecemeal Policy Possible?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(5), pages 831-866, October.
    • Handle: RePEc:bla:jpbect:v:9:y:2007:i:5:p:831-866
    DOI: 10.1111/j.1467-9779.2007.00334.x
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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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