Consider again examples 9.2 and 9.3 , and once again assume that there are two states of the world for each random variable, denoted by V^L_{j , V}^H_{j and n}^L_{, n}^H_. Denote the probabilities for these by P^L_v and P^H_v = 1– P^L_v and P^L_n and  respectively. Assume the random variables are all independent.

(a) For given firm-specific tax rates τ_j determine the firms’ equilibrium choices l_j (v^k_j) for k=L,H.

(b) Determine the optimal firm-specific tax rates.

(c) Derive a formula for the second-best optimal uniform tax rate.

Example 9.2

Example 9.3

 

Transcribed Image Text:

H p=1-ph- L