Optimal Green Taxation with Both Emission and Commodity Taxes
Several authors have argued that the second-best environmental tax on a "dirty good" is less than the marginal emission damage associated with its consumption. These studies limit their analysis to cases in which emissions can only be reduced by a proportional reduction of the "dirty" good. With a more general specification of technology that allows emissions to be directly as well as indirectly taxed, we show that the direct emission tax cannot be less than its marginal emission damage, regardless of the normalization.
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