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"More is Less": The Tax Effects of Ignoring Flow Externalities

  • Lief K. Sandal

    (Norwegian School of Economics and Business Administration)

  • Stein Ivar Steinshamn

    (Foundation for Research in Economics and Business Administration)

  • R. Quentin Grafton

    ()

    (Australian National University, Asia Pacific School of Economics and Government)

Using a model of nonlinear decay of the stock pollutant, and starting from the same initial conditions, the paper shows that an optimal tax that corrects for both stock and flow externalities may result in a lower tax, fewer cumulative emissions (less decay) and higher output at the steady state than a corrective tax that ignores the flow externality. The "more is less" result emphasises that setting a corrective tax that ignores the flow externality, or imposing a corrective tax at too low a level where there exists only a stock externality, may affect both transitory and steady state output, tax payments and cumulative emissions. The result has important policy implications for decision makers setting optimal corrective taxes and targeted emission limits whenever stock externalities exist.

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File URL: http://een.anu.edu.au/download_files/een0103.pdf
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Paper provided by Australian National University, Economics and Environment Network in its series Economics and Environment Network Working Papers with number 0103.

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Length: 18 pages
Date of creation: Nov 2001
Date of revision:
Handle: RePEc:anu:eenwps:0103
Contact details of provider: Web page: http://een.anu.edu.au/

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  1. Toman, Michael A. & Withagen, Cees, 2000. "Accumulative pollution, "clean technology," and policy design," Resource and Energy Economics, Elsevier, vol. 22(4), pages 367-384, October.
  2. Farzin, Y. H., 1996. "Optimal pricing of environmental and natural resource use with stock externalities," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 31-57, October.
  3. Hoel, Michael & Kverndokk, Snorre, 1996. "Depletion of fossil fuels and the impacts of global warming," Resource and Energy Economics, Elsevier, vol. 18(2), pages 115-136, June.
  4. Tahvonen, Olli & Salo, Seppo, 1996. "Nonconvexities in Optimal Pollution Accumulation," Journal of Environmental Economics and Management, Elsevier, vol. 31(2), pages 160-177, September.
  5. Farzin, Y H & Tahvonen, O, 1996. "Global Carbon Cycle and the Optimal Time Path of a Carbon Tax," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 515-36, October.
  6. Forster, Bruce A., 1975. "Optimal pollution control with a nonconstant exponential rate of decay," Journal of Environmental Economics and Management, Elsevier, vol. 2(1), pages 1-6, September.
  7. R. Quentin Grafton & Leif K. Sandal & Stein Ivar Steinshamn, 2000. "How to Improve the Management of Renewable Resources: The Case of Canada's Northern Cod Fishery," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(3), pages 570-580.
  8. Sinclair, Peter J N, 1994. "On the Optimum Trend of Fossil Fuel Taxation," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 869-77, Supplemen.
  9. Jorgenson, Dale W. & Wilcoxen, Peter J., 1990. "Intertemporal general equilibrium modeling of U.S. environmental regulation," Journal of Policy Modeling, Elsevier, vol. 12(4), pages 715-744.
  10. Wirl, Franz & Dockner, Engelbert, 1995. "Leviathan governments and carbon taxes: Costs and potential benefits," European Economic Review, Elsevier, vol. 39(6), pages 1215-1236, June.
  11. Ulph, Alistair & Ulph, David, 1994. "The Optimal Time Path of a Carbon Tax," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 857-68, Supplemen.
  12. Sinclair, Peter J N, 1992. "High Does Nothing and Rising Is Worse: Carbon Taxes Should Keep Declining to Cut Harmful Emissions," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(1), pages 41-52, March.
  13. Wirl Franz, 1994. "Pigouvian Taxation of Energy for Flow and Stock Externalities and Strategic, Noncompetitive Energy Pricing," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 1-18, January.
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