Abstract
Following Ramsey, the existing literature on optimal taxation only compares the pre and the post-tax market equilibriums in order to account for the efficiency losses. However, when the government imposes an ad valorem tax on the consumer, the buyer's price jumps to the pre-tax equilibrium price plus the amount of the tax, and the supply and the demand of the taxed commodity then adjust over time to bring the new post-tax market equilibrium. The existing literature does not take into account the efficiency losses during the adjustment process while computing the optimal ad valorem taxes. This paper shows how adjustment process influences the optimal ad valorem taxes, minimizing the efficiency losses (output and/ or consumption lost) during the dynamic adjustment process as well as the post-tax market equilibrium. (JEL H20, H21, H22)
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