Pigouvian Taxation in a Ramsey World
AbstractThis paper studies the optimal Pigouvian tax for correcting pollution when the government also uses distortionary taxes to raise revenues. When preferences are quasilinear in leisure and additive, the Pigovian tax can be separated from the Ramsey revenue-raising tax. We characterize the relationship between the Pigouvian tax and marginal social damages in a variety of circumstances. In a setting with homogeneous households, the Pigouvian tax exceeds marginal damages if goods have inelastic demands, and vice versa. When households are heterogeneous so taxes can be redistributive, the Pigouvian tax gives more weight to damages suffered by low-income persons. The analysis is extended to allow for costly abatement. In general corrective taxes have to be applied to both emissions and output of the polluting good.
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Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 1167.
Length: 39 pages
Date of creation: Jun 2008
Date of revision:
Pigouvian tax; optimal taxes; pollution tax;
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-27 (All new papers)
- NEP-ENV-2008-06-27 (Environmental Economics)
- NEP-PBE-2008-06-27 (Public Economics)
- NEP-PUB-2008-06-27 (Public Finance)
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