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Measuring the Welfare Effects of Tax Changes Using the LES: An Application to a Carbon Tax

  • Cornwell, Antonia
  • Creedy, John

This paper explores the use of a parametric approach to the measurement of compensating and equivalent variations resulting from price changes. The approach is based on the application of the Linear Expenditure System (LES) to each of a range of household income groups, rather than being based on a "representative" consumer. The method is then used to examine the distributional effects of a carbon tax, designed to reduce carbon dioxide emissions. The price changes resulting from a carbon tax depend on the "carbon intensities" of each good, which depend in turn on the nature of inter-industry transactions (the input-output matrix). The use of transfer payments to compensate for adverse distributional effects of a carbon tax is investigated, using social welfare functions based on equivalent incomes.

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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 22 (1997)
Issue (Month): 4 ()
Pages: 589-613

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Handle: RePEc:spr:empeco:v:22:y:1997:i:4:p:589-613
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