Question

4. Discuss the equity implications of the Ramsey Rule for optimal commodity taxation. How can these equity issues be addressed, if at all? (300 words max.)

Answer 1

The Ramsey Rule for optimal commodity taxation:-
If a commodity tax system is ideal it should decrease the quantities demanded of each taxed good by just about the same proportion.Optimal commodity taxation is selecting tax rates across goods to decrease the dead weight loss for a given government revenue.

The equity implications of the Ramsey Rule :-
The Ramsey rule says that commodities with low elasticity of demand should be taxed at higher rates than commodities with high elasticities of demad should be taxed at low rates.It means imposing a tax on a good consumed entire by higher- income groups that was much lower than the tax imposed on a good consumed by all.
So the government should tax all of the goods and services but at different rates.