Diamond-Mirrlees7_99 - Optimal Taxation Old Riddles...

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Optimal Taxation Old Riddles Neoclassical Answers Copyright 2008 by Peter Berck
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P. Berck 2 Questions Optimal Tax Deadweight Loss Tax the Rich A compromise formula Government Efficiency Social Discount Rate Border Pricing
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Review of Graphical Robinson Crusoe
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P. Berck 4 Graphical Derivation: Offer Leisure S t u f f E Offer Curve E is the consumer’s endowment of time. It is allocated to leisure or sold, called work.
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P. Berck 5 Profit Maximization Stuff = F(L) (work is L; we measure inputs as negative quantities; -F’ is marginal product!) w = 1 (wage) P is price of stuff Profit Max -P F’ = w P = -1/F’
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P. Berck 6 S t u f f 0 work L* S* L* + x x P S* = L* + profit (def. of profit) slope of the tangent line is -S*/ (L* +x) = F’ = -1/P F.O.C. for a profit max P*S* = L + x x = profit x is Profit
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P. Berck 7 S t u f f 0 work L* S* L* + profit profit Profit Max Choice of a Firm
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P. Berck 8 Robinson Crusoe: A Firm S t u f f E The price is P = 1/-F’ Pareto Optimal Competitive Equilibrium Leisure Work Consumer spends endowment plus all profits
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On to Graphical Diamond and Mirrlees
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P. Berck 10 D-M Graphic Setup Consumer owns only labor Sells labor; buys stuff at price q Firm receives p for stuff
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Diamond-Mirrlees7_99 - Optimal Taxation Old Riddles...

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