Optimal Policy with Heterogeneous Preferences
Year: 2008
Type: article
Abstract: Optimal policy rulesincluding those regarding income taxation, commodity taxation, public goods, and externalitiesare typically derived in models with homogeneous preferences. This article reconsiders many central results for the case in which preferences for commodities, public goods, and externalities are heterogeneous. When preference differences are observable, standard second-best results in basic settings are unaffected, except those for the optimal income tax. Optimal levels of income taxation may be higher, the same, or lower on types who derive more utility from various goods, depending on the nature of preference differences and the concavity of the social welfare function. When preference differences are unobservable, all policy rules may change. The determinants of even the direction of optimal rule adjustments are many and subtle.
Author: Louis Kaplow
Institutions: National Bureau of Economic Research, Harvard University
Language: English
Topic: Economic and Fiscal Studies
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3125863136