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Optimal Tax-Subsidy System for an Economy with Marshallian Externalities

Hiroaki Osana

Abstract

It is shown that, in a wide class of economies with Marshallian externalities, a Pareto optimum can be sustained by a competitive equilibrium with the aid of a tax-subsidy system. The tax-subsidy system consists of commodity taxes, commodity subsidies, lump-sum taxes, and lump-sum subsidies. The model can be interpreted as describing an economy with various kinds of public goods.