Proposals are often made to tax goods which are environmentally damaging. Many such goods are consumed both directly by households and industry at large: for example, carbon-intensive fuel, waste water or congested road space. This paper adopts a tax-reform setting to evaluate such a policy. The welfare impact is shown to depend on an input-substitution effect and an output effect on final consumption, where the latter effect can be conveniently analysed via the standard concept of the marginal welfare cost of a commodity tax. Finally, it is shown that raising a production tax is welfare enhancing if the current tax is below marginal external cost and revenues are recycled via the commodity tax with the highest marginal welfare cost.
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number
158.
Find related papers by JEL classification: H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
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