Production efficiency and excess supply

This paper demonstrates that intermediate goods should not be taxed even in the presence of dividend payments to households. We also find that optimal government policy in a second best world may include stockpiles of output—private supply exceeds private demand, and the government purchases the surplus. This may provide a possible explanation for some agricultural policies.

► Intermediate goods should not be taxed, even when dividends are paid to households. ► Second best tax policy may cause excess supply of some goods. ► Government buys the excess supply at market prices and dumps it in a stockpile. ► These results may rationalize some agricultural policies.