Environmental and tax policies and the optimal provision of clean and dirty public goods are analysed within the context of a second-best framework of optimal taxation. Households consume both clean and dirty commodities. Degradation of the natural environment occurs due to the consumption of dirty private and public goods, but can be offset when the government engages in abatement activities. The `double dividend' hypothesis, i.e. raise the dirt tax and reduce the labour tax in order to enhance both environmental quality and employment, fails. Increased environmental concern implies a higher dirt tax, a lower tax on labour, less employment and economic activity and a cleaner environment. If the elasticity of substitution between private consumption commodities and leisure is large, and that between clean and dirty goods is small, public consumption expands while private consumption contracts. Otherwise, public consumption falls.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
745.
Find related papers by JEL classification: E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation H41 - Public Economics - - Publicly Provided Goods - - - Public Goods Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
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