Ramsey problem

The Ramsey rule ( by Frank Plumpton Ramsey ) is a result of the theory of optimal taxation. Often the Ramsey rule is mistakenly referred to as the inverse elasticity rule. However, the inverse elasticity rule is just a special case of the Ramsey rule, are excluded in the cross-price effects.

Suppose that you want a certain level of revenue achieved and a flat tax ( poll tax ) was not available, but only indirect taxes on the goods i = 1, ..., n The taxation will now be such that the entire welfare - the sum of producer surplus and consumer surplus - is maximized. This is particularly in public infrastructure with not attributable to fixed costs and constant marginal costs of meaning. Here different product lines offered (such as freight and passenger transport in transport operations ).

Under the assumption that the demand functions are independent of each other, indicates the Ramsey rule that tax rates are to be levied on the individual goods. The tax rates are inversely proportional to the price elasticity of demand. This means that the tax rate must be smaller, the more sensitive the demand to price increases.

The rule for optimal cost-covering charges read as follows:

( = Price of the ith good; = marginal cost in the market of the ith good; = price elasticity of demand for the ith good. )

If the demand functions linear, so the demand goes for all goods returned by the same percentage.

Unlike the golden rule of accumulation of Phelps, the Ramsey rule also takes into account time preferences. Another alternative demand- dependent price differentiation is the peak-load pricing.

A continuation of the Ramsey rule is the Corlett -Hague rule.

• Taxes and duties