Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 886: Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences

Thomas Aronsson () and Olof Johansson-Stenman ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Postal: University of Gothenburg, SE – 405 30 Gothenburg, Sweden

Abstract: This paper analyzes optimal differential commodity taxation, together with optimal nonlinear income taxation, in order to deal with positional preferences. It also derives the optimal public provision of private goods both when differential commodity taxation is feasible and when it is not. It is shown that publicly provided non-positional private goods which are (possibly imperfect) substitutes for positional private goods should be used as a corrective instrument even if the tax system is optimal, i.e. even when differential commodity taxation is feasible. An exception is the special case where all consumers contribute equally much to the positional externality, in which the commodity tax constitutes a perfect instrument for internalizing the positional externality.

Keywords: Public provision of private goods; income taxation; commodity taxation; relative consumption; asymmetric information; status; positional goods

JEL-codes: D62; H21; H23; H41

37 pages, May 6, 2014

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