Exercise 12.11

Optimality of a Constant Tax on Tradable Consumption

⬅ Return

Problem

In Section 12.10, we showed that the unconstrained equilibrium can be supported by a subsidy on nontradable consumption financed by lump-sum taxes. Show that the unconstrained equilibrium can also be supported by a tax on tradable consumption financed with lump-sum taxes. Show that unlike the scheme based on nontradable taxation, the present scheme must feature a constant tax rate in general.

Answer

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