Optimal commodity taxation for reduction of envy

This paper derives optimal commodity taxes in a two-class economy based on λ-equitability. An allocation is λ-equitable if no agent envies a proportion λ of the bundle of any other agent. We examine the properties of Pareto undominated allocations in a class of λ-equitable allocations. We first show that the consistency between envy reduction and enhancement of the low-skilled agent’s utility depends on 1) the income elasticity of leisure 2) the degree of preference and skill differences. On the optimal tax rule, we can show the following. When the envy constraint is binding, ceteris paribus, the goods preferred by the low skilled agent and of high Hicksian elasticities are taxed more heavily. The optimal commodity tax is uniform if, in addition to weak separability, sub-utility of the goods is homothetic.