When government needs more revenue than is available from a pollution tax rate equal to marginal environmental damage, our intuition tells us to raise the tax on the clean good above zero and to raise the tax on the dirty good above that first-best Pigouvian rate. Yet new results suggest that the second-best pollution tax is below the Pigouvian rate. This note reconciles these views by pointing out that these new results use a labor tax to acquire additional revenue, and that the labor tax is equivalent to a uniform tax on both clean and dirty goods. Thus, depending on the normalization, the total tax on the dirty good can be above the Pigouvian rate. These recent results are meant to show that the difference between the tax on the dirty good and the tax on the clean good is less than the Pigouvian rate. Any one tax rate can be set to zero as a conceptual matter, but implementation of some taxes might be easier than others as a practical matter.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5511.
Length: Date of creation: Mar 1996 Date of revision: Handle: RePEc:nbr:nberwo:5511
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Find related papers by JEL classification: H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
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