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Fairness in Markets and Government Policies

By Shinji Yamashige

Abstract

An allocation is said to be ``weakly envy-free'' if there is no individual who envies others with the same or smaller endowments. The requirement is a necessary condition for an allocation to be envy-free [Foley (1967)]. We show that competitive equilibrium allocations in exchange economies are weakly envy-free, i.e., this weak notion of fairness is achieved in markets. Since governments are expected to improve fairness in economies, it seems natural to require government policies satisfy this minimum requirement, which we refer to as no-envy criterion. We show that well-known equity criteria for government policies need not satisfy the no-envy criterion. Since the benefit tax (e.g., Lindahl tax) in general does not satisfy the no-envy criterion either, we argue that it is not a fair tax to finance pure public goods and show a result which supports income tax and commodity tax as fair taxes. The result suggests that the no-envy criterion may be indeed adopted by governments as an equity criterion. It is also argued that when public goods are not pure the benefit tax must be introduced because the income tax and the commodity tax no longer satisfy the no-envy criterion.Fairness, Competative Equilibrium, Government Policy

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