Optimal Redistribution with Unobservable Preferences for an Observable Merit Good

This paper considers a government thatseeks both to redistribute income and to encourage or discouragethe consumption of a certain good. This good is assumed to beeither a merit or demerit good. Individuals differ in their exogenousincome and in their preferences for the merit good. The onlyvariable the government can perfectly observe is each individual'sconsumption of the merit good. In order to account for meritgood considerations, we consider a modification of the utilitariansocial welfare function in which the government imposes uniformpreferences, despite the heterogeneous individual preferences,at a level which will depend on the merit or demerit nature ofthe observable good. We derive the optimal nonlinear redistributivepolicy and compare our results to the ones that would be obtainedunder a utilitarian social welfare function that respects theown preferences of individuals. Copyright Kluwer Academic Publishers 2000