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Principle of Targeting in Environmental Taxation

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  • Firouz Gahvari

    (University of Illinois)

Abstract

This paper re-examines Sandmo’s (1975) celebrated “additive property†and the principle of targeting in environmental taxation. It argues that, in theabsence of direct emission taxes, one cannot in general divide commodity taxes into two mutually exclusive separate components of Pigouvianexternality-correcting and Ramsey revenue-raising. Externality-correcting terms appear also in the expressions for the taxes on non-polluting goods–aswell as in the expressions for taxes on the polluting goods–unless preferences are additively quasilinear either in one of the non-pollutinggoods or in the labor supply. On the other hand, in the presence of direct emission taxes, one can use emission taxes for externality correction andleave commodity taxes for revenue raising. Nevertheless the optimal emission tax is, in general, different from the marginal social damage of emissions.

Suggested Citation

  • Firouz Gahvari, 2010. "Principle of Targeting in Environmental Taxation," Korean Economic Review, Korean Economic Association, vol. 26, pages 223-266.
    • Handle: RePEc:kea:keappr:ker-20101231-26-2-01
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    References listed on IDEAS

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    1. A. Lans Bovenberg & Frederick van der Ploeg, 2002. "Environmental Policy, Public Finance and the Labour Market in a Second-Best World," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 6, pages 112-153, Edward Elgar Publishing.
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    Cited by:

    1. Firouz Gahvari, 2014. "Second-Best Pigouvian Taxation: A Clarification," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 59(4), pages 525-535, December.

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    More about this item

    Keywords

    second-best; emission taxes; Ramsey taxes; Pigouvian taxes; additive property; principle of targeting;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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