In developed countries, car use is one of the most significant contributors to air pollution. It is also a notable fact that larger, heavier cars consume more fuel and hence contribute more to pollution. This observation has lead to policy proposals to structure taxation to encourage the use of smaller, lighter cars. A model of vertical product differentiation is used to explain why different types of car are chosen. The correct policy response to the externality problem is then investigated using this model. It is shown that there are reasons why the standard policy response may be flawed and that it may even be optimal to subsidize large cars at the expense of small. A comparison of policies reveals that the relative merits of differentiated annual taxes and differentiated fuel taxes are dependent on the degree of income inequality.
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Paper provided by University of Exeter, School of Business and Economics in its series Discussion Papers with number
00/10.
Length: 28 pages Date of creation: 2000 Date of revision: Handle: RePEc:fth:exetec:00/10
Contact details of provider: Postal: School of Business and Economics University of Exeter Streatham Court Rennes Drive Exeter EX4 4PU Phone: (01392) 263218 Fax: (01392) 263242 Web page: http://www.exeter.ac.uk/sobe/ More information through EDIRC
Find related papers by JEL classification: H2 - Public Economics - - Taxation, Subsidies, and Revenue R4 - Urban, Rural, and Regional Economics - - Transportation Systems
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