OPTIMAL TAXATION AND PRODUCTION EFFICIENCY RECONSIDERED

Abstract

This paper elucidates the question of whether production efficiency (in the weak sense) obtains in an optimally taxed economy, which is posed by the seminal paper of Diamond and Mirrlees. This paper presents a complete conclusion and a proof for that the (desirability of) production efficiency holds, except (i) a not interesting case where private production is wholly less efficient than public production, or (ii) a case where some good(s)is exempt from tax imposition.