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Environmental Levies, Distortionary Taxation and Increasing Returns

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  • Wenli Cheng
  • Dingsheng Zhang
  • CEMA

Abstract

In this note, we introduce increasing returns to Bovenberg and Mooij's (1994) model as generalised in Fullerton (1997) and use an example to show that (1) even with a distortionary labor tax, the optimal environmental levy is greater than the Pigouvian rate; (2) the difference between tax on the "dirty" good and the "clean" good is also greater than the Pigouvian tax; (3) under certain circumstances, the government can optimally use the environmental levy to both meet its revenue requirement and subsidize the "clean" goods with increasing returns.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2014/1014environmentalchengzhangcema.pdf
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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 10-14.

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Length: 9 pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:mos:moswps:2014-10

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Keywords: environmental levies; distortionary taxation; increasing returns;

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