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Optimal Tax and Public Investment Rules for Congestion Type of Externalities

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  • Inge Mayeres
  • Stef Proost

Abstract

Optimal government policy is considered in a second‐best framework where consumers and producers cause an externality of the congestion type and income distribution issues are taken into account. The theoretical results of the optimal tax literature are adapted using the concept of the net social Pigouvian tax. An illustrative AGE model uncovers the relative importance of its components. The model demonstrates that the level of the externality tax does not depend strongly on distribution concerns, as reoptimization of the other taxes ensures that the income distribution objective is reached. The model also allows us to study the interaction between externality taxes and public abatement.

Suggested Citation

  • Inge Mayeres & Stef Proost, 1997. "Optimal Tax and Public Investment Rules for Congestion Type of Externalities," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 261-279, June.
    • Handle: RePEc:bla:scandj:v:99:y:1997:i:2:p:261-279
    DOI: 10.1111/1467-9442.00062
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