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Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology

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  • Kim Seung-Rae

    () (University of Texas at Austin)

Abstract

Recent studies find that environmental taxes typically exacerbate pre-existing tax distortions and, therefore, the optimal pollution tax should lie below the Pigouvian level (social marginal damages). This paper analyzes a general equilibrium model with non-separable preferences and technology, relatively rare assumptions in this literature, and finds that the second-best optimal pollution tax can be above or below the first-best Pigouvian level. Surprisingly, the ordering of the two does not depend on the degree of pre-existing tax distortion. Moreover, it depends not just on the difference between the two goods' cross-price elasticities with leisure, but on that difference compared to the elasticity of demand for the polluting intermediate input. Finally, the paper shows that under plausible parameter conditions, a greater pre-existing tax distortion can increase the optimal level of environmental regulation.

Suggested Citation

  • Kim Seung-Rae, 2002. "Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-27, July.
  • Handle: RePEc:bpj:bejeap:v:contributions.1:y:2002:i:1:n:4
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    Cited by:

    1. Fullerton, Don & Wolverton, Ann, 2005. "The two-part instrument in a second-best world," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1961-1975, September.
    2. Sarah E. West & Roberton C. Williams III, 2004. "Empirical Estimates for Environmental Policy Making in a Second- Best Setting," Public Economics 0402005, EconWPA.
    3. Carbone, Jared C. & Smith, V. Kerry, 2008. "Evaluating policy interventions with general equilibrium externalities," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1254-1274, June.
    4. West, Sarah E. & Williams III, Roberton C., 2007. "Optimal taxation and cross-price effects on labor supply: Estimates of the optimal gas tax," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 593-617, April.

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