Public Economics Lectures Part 1: Introduction

Diamond and Mirrlees: Production Effi ciency
Diamond and Mirrlees result was an advance because it showed a
general policy lesson even in second-best environment
Example: Suppose government can tax consumption goods and also
produces some goods on its own (e.g. postal services)
May have intuition that government should try to generate profits in
postal services by increasing the price of stamps
This intuition is wrong: optimal to have no distortions in production
of goods
Bottom line: only tax goods that appear directly in agent’s utility
functions
Should not distort production decisions via taxes on intermediate
goods, tariffs, etc.
Public Economics Lectures () Part 4: Optimal Taxation 29 / 121