Fair Commodity Taxation

TL;DR

This paper analyzes how correlation structures in consumer valuations affect fairness in commodity taxation and identifies mechanisms that optimize fairness and efficiency.

Contribution

It characterizes the impact of valuation correlation on fairness, explores taxation's role in managing information rents, and defines the fairness-efficiency frontier.

Findings

Correlation shifts influence fairness in consumer surplus distribution.

Taxation cannot improve fairness through randomization of allocations.

On the fairness-efficiency frontier, allocations ration goods more than unregulated monopolists.

Abstract

We study economies where consumers interact independently with many monopolists. When consumer valuations over goods are correlated, correlation can distort the induced distribution of consumer surplus (information rents). We identify which shifts in the correlation structure over values makes the induced distribution more or less fair, in the sense of second order stochastic dominance. We then investigate the role taxation can have on information rents, and show the tax authority never benefits from randomizing the allocation of goods. We characterize the set of mechanisms that are on the fairness-efficiency frontier under regularity conditions on the distribution of types. Furthermore, under these conditions all allocations on the fairness-efficiency frontier ration the good more than an unregulated monopolist. Finally, we discuss implications of our model for luxury commodity taxation.