A two-period endowment economy as we studied in class has consumers with identical preferences and the consumption
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A two-period endowment economy as we studied in class has consumers with identical preferences and the consumption good is non storable. Suppose that there is a benevolent government (i.e. a government that seeks to maximize the welfare of consumers) that imposes lump-sum taxes and make lump-sum transfers. (Recall, taxes can be negative, in which case they are called transfers.) The government must satisfy its present-value budget constraint
where T t denotes taxes (T t > 0) or transfers (T t 1 is much larger than the period 2 one, y 2 , but that the consumer prefers similar consumption levels in both periods. A politician claims that the welfare of consumers can be improved in this situation by imposing a tax-transfer scheme such that T 1 > 0 and T 2
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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