Distortionary Taxes Preserve the Environment
Recently, it became customary to argue that environmental quality - like ordinary public consumption - is crowded out by distortionary taxation. We show that this hypothesis does not hold provided that the marginal revenue of the environmental tax is positive. In this case, under-provision of public goods implies over-provision of environmental quality in second best. Hence, contrary to the impression left by the recent literature, distortionary taxes may actually provide more room for environmental protection than lump-sum taxes.
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