ECON401 Lecture Notes - Lecture 9: John Burbidge, Expenditure Function, 96.5 Wave Fm
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Department of economics, university of waterloo, waterloo, ontario, canada, n2l 3g1, jbur- bidg@uwaterloo. ca. With two goods and leisure, each person"s budget constraint can be written as p1x1 + p2x2 + wl = wl, where l is the time endowment and (p1, p2, w) are the prices of (x1, x2, l). 1. Assume that the government wishes to raise given revenue with the smallest decrease in utility and lump-sum taxes are ruled out. Assuming that leisure cannot be taxed directly and that the government uses proportional tax rates, the options in the present setting are commodity taxes, t1 and t2 and an earnings tax, te. Since the following equations (1 + t1a)p1x1 + (1 + t2a)p2x2 = (1 te)w(l l) (1 + t1)p1x1 + (1 + t2)p2x2 = w(l l) are the same if tj are de ned by. 1 te assuming the government uses only commodity tax rates does not diminish the gov- ernment"s e ectiveness.
