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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 lump-sum 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