Welfare effects of tax and price changes

This paper studies a model of equilibrium in an economy without distributional problems but with distortions. The case where the distortions are due to specific taxes is examined in particular detail. A formula is derived to compare the utility levels in neighbouring equilibria corresponding to slightly different distortion levels. Several well known results in welfare economics and public finance are derived as corollaries, and other applications are suggested. An interpretation using consumers' and producers' surplus is given.