"More is Less": The Tax Effects of Ignoring Flow Externalities
AbstractUsing a model of nonlinear decay of the stock pollutant, and starting from the same initial conditions, the paper shows that an optimal tax that corrects for both stock and flow externalities may result in a lower tax, fewer cumulative emissions (less decay) and higher output at the steady state than a corrective tax that ignores the flow externality. The "more is less" result emphasises that setting a corrective tax that ignores the flow externality, or imposing a corrective tax at too low a level where there exists only a stock externality, may affect both transitory and steady state output, tax payments and cumulative emissions. The result has important policy implications for decision makers setting optimal corrective taxes and targeted emission limits whenever stock externalities exist.
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Bibliographic InfoPaper provided by Australian National University, Economics and Environment Network in its series Economics and Environment Network Working Papers with number 0103.
Length: 18 pages
Date of creation: Nov 2001
Date of revision:
Contact details of provider:
Web page: http://een.anu.edu.au/
taxes; stock and flow externalities; nonlinear decay; climate change;
Other versions of this item:
- Sandal, Leif K. & Steinshamn, Stein Ivar & Grafton, R. Quentin, 2003. ""More is less": the tax effects of ignoring flow externalities," Resource and Energy Economics, Elsevier, vol. 25(3), pages 239-254, August.
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
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