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Subsidies, costs, and local taxes: a theoretical note on circular economy investments

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  • Iacopo Grassi

    (University of Naples Federico II)

Abstract

This paper develops a theoretical model to examine how investment subsidies for circular economy projects influence local taxation in decentralized governance systems. When environmental infrastructure is co-financed by higher-level governments but operated locally, fiscal effects depend on how investments modify cost structures. Using a principal–agent framework, I show that the relationship between subsidies and local taxes is non-monotonic: at low investment levels, subsidies reduce costs and taxes, but beyond the efficiency threshold, further investment raises operational complexity and fiscal pressure. A dynamic extension incorporating transition costs explains why local taxes may temporarily increase before efficiency gains materialize. The model offers a tractable framework to interpret the fiscal implications of circular economy policies within multi-level European governance, with specific relevance to current EU funding schemes.

Suggested Citation

  • Iacopo Grassi, 2026. "Subsidies, costs, and local taxes: a theoretical note on circular economy investments," Economics Bulletin, AccessEcon, vol. 46(1), pages 209-218.
    • Handle: RePEc:ebl:ecbull:eb-25-00481
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    Keywords

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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