Some Marginalist Intuition Concerning the Optimal Commodity Tax Problem

Abstract

The author offers a simple intuition that can be exploited to derive and to help interpret some canonical results in the theory of optimal commodity taxation. He develops and explores the principle that the marginal social welfare loss per last unit of tax revenue generated be equalized across tax instruments. A simple two-consumer, two-taxed-commodity economy is used to explore how this intuition can be used to derive the famous inverse elasticity rule, as well as the modifications and extensions needed to account for the redistributive effects of commodity taxes.

Keywords:

• commodity taxes
• inverse elasticity rule
• marginal social welfare loss
• JEL codes: A20, H21