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Optimal Tax Policy with Environmental Externalities and Heterogeneous Preferences

Author

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  • Sanna Tenhunen

    (School of Management, University of Tampere)

Abstract

This study considers simultaneously two important aspects of taxation, environmental policy and redistribution. Tax policy is constrained by the a symmetric information of agents’ productivities and preferences. Two-dimensional heterogeneity affects the optimality of commodity taxation: it can be used to redistributional or environmental purposes, but there seems to be a trade-off between these objectives. However, the contradiction between the two aspects is not as clear as in the case with identical consumer preferences. It is also shown that the Sandmo-Dixit result of these parability of environmental taxes fails with two-dimensional heterogeneity in the pool ingoptimum, but not in these parating optimum. The explanation to this is that there are too few policy instruments in the pooling equilibrium: commodity taxes should take care of both redistribution and externality internalisation.

Suggested Citation

  • Sanna Tenhunen, 2005. "Optimal Tax Policy with Environmental Externalities and Heterogeneous Preferences," Working Papers 0541, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:0541
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    File URL: http://urn.fi/urn:isbn:951-44-6332-3
    File Function: First version, 2005
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    More about this item

    Keywords

    heterogeneous preferences; externalities; commodity taxation;
    All these keywords.

    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

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