Economics · Public Finance
The Ramsey rule (inverse elasticity rule) in optimal commodity taxation prescribes that tax rates should be set such that:
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- 1The marginal deadweight loss per rupee of revenue is unequal across goods
- 2Goods with higher income elasticity face higher ad valorem tax rates
- 3The proportional reduction in compensated (Hicksian) demand is equalized across all taxed goods✓
- 4Taxes are proportional to the price elasticity of demand for each good
Correct answer
The proportional reduction in compensated (Hicksian) demand is equalized across all taxed goods
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