Public Economics Lectures Part 1: Introduction

Second Welfare Theorem: Information Constraints
To set the optimal lump-sum taxes, need to know the characteristics
(ability) of each individual
But no way to make people reveal their ability at no cost
Incentive to misrepresent skill level
Tax instruments are therefore a fn. of economic outcomes
E.g. income, property, consumption of goods
→ Distorts prices, affecting behavior and generating DWB
Information constraints force us to move from the 1st best world of
the second welfare theorem to the 2nd best world with ineffi cient
taxation
Cannot redistribute or raise revenue for public goods without
generating effi ciency costs
Public Economics Lectures () Part 4: Optimal Taxation 5 / 121