NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Policy with Heterogeneous Preferences

Louis Kaplow

NBER Working Paper No. 14170
Issued in July 2008
NBER Program(s):Environment and Energy Economics, Law and Economics, Public Economics

Optimal policy rules--including those regarding income taxation, commodity taxation, public goods, and externalities--are typically derived in models with homogeneous preferences. This article reconsiders many central results for the case in which preferences for commodities, public goods, and externalities are heterogeneous. When preference differences are observable, standard second-best results in basic settings are unaffected, except those for the optimal income tax. Optimal levels of income taxation may be higher, the same, or lower on types who derive more utility from various goods, depending on the nature of preference differences and the concavity of the social welfare function. When preference differences are unobservable, all policy rules may change. The determinants of even the direction of optimal rule adjustments are many and subtle.

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Document Object Identifier (DOI): 10.3386/w14170

Published: Louis Kaplow, 2008. "Optimal Policy with Heterogeneous Preferences," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(1).

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