Administrative Costs and Production Efficiency.

Abstract

Economists providing policy advice often justify recommendations of government non-interference in the allocation of resources between production sectors and free trade with reference to the Diamond and Mirrlees efficiency theorem. However, such policy advice may be misleading when, as is in general the case, administrative costs effectively restrict the set of feasible tax instruments available to the government. Under plausible assumptions about the administrative costs of alternative tax structures optimal government policies may in fact be associated with significant production inefficiencies.