REDISTRIBUTION AND SMALL COALITIONS OF FRIENDS

When side marketing trade is perfect, linear taxation of retradeable c ommodities is the only scheme that survives attempts to arbitrage. In this paper, I discuss tax schemes when side trading is imperfect in th e sense that commodities can only be re-exchanged within coalitions no larger than two people. In the framework of a two-class economy, I id entify coalitions which might have an incentive to form and provide a characterisation for the Pareto-efficient tax scheme. The tax formula has a very simple form and strongly resembles the formula for the no-s ide-trade case. In a numerical exercise, the constraints imposed on po licy by an imperfect side trading process are found to be almost as to ugh as those imposed by perfect side trading.