TY  - JOUR
AU  - Kaplow,Louis
TI  - Optimal Policy with Heterogeneous Preferences
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14170
PY  - 2008
Y2  - July 2008
UR  - http://www.nber.org/papers/w14170
L1  - http://www.nber.org/papers/w14170.pdf
N1  - Author contact info:
Louis Kaplow
Harvard University
Hauser 322
Cambridge, MA  02138
Tel: 617/495-4101
Fax: 617/496-4880
E-Mail: meskridge@law.harvard.edu
AB  - 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.
ER  -