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NotesECN741-page11 - h x h l =-f z f l It means that it is...

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ECN 741: Public Economics Fall 2008 Finally, feasibility and market clearing c 1 + g 1 = x 1 c 2 + g 2 + z = x 2 f ( x 1 , z, l 1 ) = 0 h ( x 2 , l 2 ) = 0 The Ramsey problem is max U ( c 1 , c 2 , l 1 + l 2 ) subject to U 1 c 1 + U 2 c 2 + U l ( l 1 + l 2 ) = 0 λ f ( c 1 + g 1 , z, l 1 ) = 0 φ 1 h ( c 2 + g 2 + z, l 2 ) = 0 φ 2 FOC w.r.t z φ 1 f z = - φ 2 h x FOC w.r.t l 1 and l 2 U l + λ ( U ll ( l 1 + l 2 ) + U l + U cl c ) = f l φ 1 U l + λ ( U ll ( l 1 + l 2 ) + U l + U cl c ) = h l φ 2 and therefore, f l φ 1 = h l φ 2 . This implies that h x h l = - f z f l
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Unformatted text preview: h x h l =-f z f l It means that it is optimal to set τ z = 0 and not distort production efficiency. For more on intermediate good taxation and production efficiency see Diamond and Mirrlees ( 1971 ). 11...
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