Optimal Taxation in a Rent-Seeking Environment
A basic proposition in public finance is that, other things being equal, the less the price elasticity of demand for a good or service the smaller the welfare loss from imposing an excise tax on it. More generally, when considering the optimal pattern of excise taxes on a number of commodities, an inverse relation exists between the tax and the price elasticity of demand. This inverse relation holds in both partial equilibrium models (Hicks, 1947) and general equilibrium models (Baumol and Bradford, 1970; Sandmo, 1976).
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