NotesECN741-page30 - ECN 741 Public Economics 3 Fall 2008...

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ECN 741: Public Economics Fall 2008 3 Mirrleesian Approach to Optimal Taxation One criticism of the Ramsey approach is the ad hoc assumption of linear distortionary taxes exclusion of Lump-sum taxation. At the same time without imposing these restrictions or without including informational frictions the Lump-taxes are very desirable in these models. We saw Werning ( 2007 ) as an attempt to move away from this limitations and expand the set of instruments available to government, i.e., Lump-sum taxes together with uniform distortionary taxes across individuals. In doing that he appeals to informational friction, i.e., the fact that individuals type (skill) is not observable and hence cannot be taxes. But is it the best government can do? Is it possible for government to implement more sophisticated instruments and achieve “better” outcomes (lets agree for now that “better” means, higher welfare given a welfare function)? What are these instruments? How we possibly restrict the set instruments available to government? In Mirrleesian approach set of instruments is pinned down by information/enforcement lim-
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This note was uploaded on 12/10/2011 for the course MAT 121 taught by Professor Wong during the Fall '10 term at SUNY Stony Brook.

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