Ramsey Rule
Updated 2026-07-31
INTRODUCTION
English translation pending.
CORE DEFINITION
A result in optimal commodity taxation derived by Frank Ramsey. To raise a fixed revenue with the least loss of welfare, tax rates should be inversely related to demand elasticities: goods whose demand barely responds to price carry higher rates, while highly responsive goods carry lower ones. The rule equalises the marginal excess burden across commodities. A later refinement, the Ramsey-Boiteux version, replaces the inverse elasticity term with the inverse of the elasticity of compensated demand and also accounts for whether goods are complements to leisure.
SCAFFOLDING EFFECT
Reduce cognitive load
- Rate Allocation: put the heaviest rates on the tax bases that respond least to price. - Distortion Budget: equalise the marginal excess burden across goods instead of equalising the rates themselves. - Fairness Overlay: re-examine the result for regressivity before adopting it in a real tax code.
Anchor fast decisions
The welfare cost of a tax comes from the behaviour it changes. A good whose demand barely moves when the price rises loses little surplus for each dollar of revenue raised, while a responsive good loses a great deal. Setting rates inversely to elasticity therefore minimises the total distortion for any given revenue target. The logic is identical to the general principle of raising revenue where the base is least elastic.
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
account_treeGenealogyexpand_more
menu_bookReferencesexpand_more
Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Keynes%E2%80%93Ramsey_ruleverified
PRIVATE NOTES · Only visible to you
SAVED Q&A
ENTRY Q&A · Private saving available
Ask with a clear boundary
thinkingmodels answers from published entry context only.
Your question is sent to thinkingmodels. The answer uses public entry context only.
RELATED MODELS