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Unformatted text preview: Optimal Commodity Taxation Suppose there are two goods (X and Y) with compensated elasticities of demand of 1.0 and 0.5, respectively. They are neither substitutes nor complements. a. What can you say about the relative rate of ad valorem commodity taxation on X and Y based on the principles of optimal taxation? b. What can you say about the reduction in compensated demand for X and Y which will occur due to optimal commodity taxation? c. Comment on these taxes using the criteria of horizontal equity and vertical equity . d. Could excess burden be reduced by replacing optimal commodity taxes with a lumpsum tax which yields the same revenue? Economics 131 Problem Set #4 Page 2....
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This note was uploaded on 10/15/2009 for the course ECON 131 taught by Professor Staff during the Spring '08 term at UC Davis.
 Spring '08
 Staff
 Economics

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