Redistribution and Internalization : The Many-Person Ramsey Tax Rule Revisited

The paper studies the trade-off between efficiency and equity objectives within a model of commodity taxation. It derives two formulations for a many-person Ramsey tax rule in the presence of externalities. The first tax rule reveals that the aggregate compensated decrease in the demand for a taxed good should be the larger, (i) the more luxurious the good and (ii) the stronger complements the taxed and the polluting good are. The second tax rule shows that the standard many-person Ramsey rule holds for the non-environmental part of a commodity tax, provided that the consumption of the polluting good is already subject to a second-best optimal internalization tax