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Setting Environmental Taxes in a Second-best World

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Author Info
William K. Jaeger () (Williams College)
Abstract

This paper compares the optimal environmental tax with two alternative definitions of marginal environmental damages. One definition reflects the social marginal rate of substitution between income and the environment; the other reflects the sum of households?marginal willingness to pay. The analysis finds that the definition based on the social marginal rate of substitution provides a consistent benchmark for setting environmental taxes that is compatible with both the Pigouvian principle and the double dividend hypothesis. The definition based on the sum of households?marginal willingness to pay, however, is found to be incompatible with optimal taxation and an unreliable benchmark for making welfare inferences.

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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 186.

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Date of creation: Feb 2001
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Handle: RePEc:wil:wileco:186

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Related research
Keywords: environmental tax; second best; double dividend; optimal taxation;

Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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  1. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, vol. 87(1), pages 252-53, March. [Downloadable!] (restricted)
  2. Ronnie Schöb, 1997. "Environmental Taxes and Pre-Existing Distortions: The Normalization Trap," International Tax and Public Finance, Springer, vol. 4(2), pages 167-176, May. [Downloadable!] (restricted)
  3. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November. [Downloadable!] (restricted)
  4. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March. [Downloadable!] (restricted)
  5. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November. [Downloadable!] (restricted)
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  6. Terkla, David, 1984. "The efficiency value of effluent tax revenues," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 107-123, June. [Downloadable!] (restricted)
  7. Bovenberg, A. L. & van der Ploeg, F., 1994. "Environmental policy, public finance and the labour market in a second-best world," Journal of Public Economics, Elsevier, vol. 55(3), pages 349-390, November. [Downloadable!] (restricted)
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  8. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September. [Downloadable!] (restricted)
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  9. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier. [Downloadable!] (restricted)
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  10. Fullerton, Don, 1997. "Environmental Levies and Distortionary Taxes: Comment," American Economic Review, American Economic Association, vol. 87(1), pages 245-51, March. [Downloadable!] (restricted)
  11. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September. [Downloadable!] (restricted)
  12. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September. [Downloadable!] (restricted)
  13. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-48, July. [Downloadable!] (restricted)
  14. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January. [Downloadable!] (restricted)
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