Real-World Applicationshard
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A government wants to levy commodity taxes on two goods to raise a fixed revenue while minimizing deadweight loss. The price elasticities of demand are and . Supply is perfectly elastic for both goods. According to the Ramsey Rule, what is the optimal ratio of tax rates (expressed as a fraction of price)?
A government wants to levy commodity taxes on two goods to raise a fixed revenue while minimizing deadweight loss. The price elasticities of demand are and . Supply is perfectly elastic for both goods. According to the Ramsey Rule, what is the optimal ratio of tax rates (expressed as a fraction of price)?