The Ramsey Rule

The Ramsey Rule is an economic principle used to determine optimal taxation. It suggests that to minimize the negative effects of taxes on economic efficiency, taxes should be higher on goods and services with less elastic demand (where consumers won’t easily reduce their consumption) and lower on those with more elastic demand. This approach helps generate necessary government revenue while causing the smallest possible distortion to people's choices and overall economic activity. In essence, it guides policymakers to set taxes in a way that balances government needs with maintaining economic well-being.